Serbian Rate Outlook Mixed After Kosovo Accord Rejected

Economists are split on whether Serbia’s central bank will hold or cut rates after the nation jeopardized its chances of joining the European Union by refusing to sign a deal with the breakaway province of Kosovo.

Twelve economists expect the Belgrade-based Narodna Banka Srbije to leave the one-week repurchase rate at 11.75 percent, according to a Bloomberg survey. The same number of economists predicted a quarter-point to half-point reduction. The central bank will announce its decision at noon in Belgrade tomorrow.

“There’s a pure political risk at this moment which could destabilize the market and that’s why we expect them to first hold the rate and then start with cuts,” Ljiljana Grubic, the chief analyst at Belgrade-based Raiffeisen Banka AD, said by phone. “Cutting the rate now could trigger dinar volatility and they will surely be careful about the timing, size and pace of future cuts.”

Premier Ivica Dacic’s government rejected an EU-mediated agreement on normalizing relations with Kosovo two days ago and called for further negotiations, jeopardizing Belgrade’s drive to start entry talks with the 27-nation bloc in June. Serbia needs deeper EU ties after the wars of the 1990s stunted its economy’s transition from communism.

The central bank paused its tightening cycle on March 12 to assess price pressures before reducing borrowing costs to spur growth after the economy fell into its second recession in three years. The bank raised rates eight times in the previous nine meetings.

‘Every Reason’

Rate setters pledged on Feb. 13 to consider changes to monetary policy as inflation pressures based on food and regulated prices ease. Vice Governor Veselin Pjescic said the current rate level is sufficiently restrictive as long as current forecasts, including for an economic contraction of 0.1 percent and 2 percent inflation in the 17-nation euro area this year, are met.

“Except for political circumstances, the central bank has every reason to lower the interest rate because inflation has not exceeded 0.5 percent per month for the past four months,” Jasna Atanasijevic, chief economist at Belgrade-based Hypo Alpe-Adria Bank AD, said by phone.

Serbia’s rate trend contrasts with others in the region, where borrowing costs are falling to halt economic slowdowns amid Europe’s debt crisis. The National Bank of Serbia wants to ease price pressures stemming from regulated price increases and expanded dinar liquidity.

“They will cut the rate because inflation has already slowed and it will continue to ease in the next three months because of cheaper agricultural products,” said Predrag Stojanovic, head of treasury at Belgrade-based Piraeus Banka AD.

Inflation has been accelerating since April 2012, when it fell to a 30-year low of 2.7 percent, due to rising food costs amid a drop in farm output. The rate reached 12.4 percent in February and is expected to peak at 14 percent through April. The central bank wants to bring it down to 4 percent, plus or minus 1.5 percentage points, by December.

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