Serb Central Bank to Refrain From Rate Cut as Dinar Plunges

Serbia’s central bank will probably refrain from lowering borrowing costs after the dinar weakened as the government slipped on fiscal targets.

The Narodna Banka Srbije in Belgrade will leave its one-week repurchase rate at 11.25 percent, according to 14 of 24 economists in a Bloomberg survey. Eight predict a quarter-point cut and one forecasts a reduction to 10.75 percent. The bank will announce the decision tomorrow at about noon.

The National Bank of Serbia lowered its benchmark rate by a half-point to 11.25 percent on May 14 for the first time in 16 months, citing a strong currency. Investors sold off the dinar and the country’s bonds after the International Monetary Fund said on May 22 the budget deficit may reach 8 percent of economic output, more than double the initial target of 3.6 percent of GDP, unless the government takes steps to narrow it.

“They should leave the key rate unchanged because of the weakening dinar and deteriorating market sentiment after the IMF report, which cast doubt on the feasibility of the planned budget gap,” Jasna Atanasijevic, chief economist at Hypo Alpe-Adria Bank AD in Belgrade, said by phone yesterday. Any “rate cut at this point” may further spoil market sentiment while a “rate increase would be a sign of panic.”

The dinar traded down 0.1 percent at 113.4690 to the euro at 5:24 p.m. in Belgrade, data compiled by Bloomberg show. The yield on Serbia’s dollar bond maturing in 2021 rose to 5.69 percent from 5.56 percent yesterday.

Fiscal Consolidation

The central bank should relax monetary conditions only “when fiscal consolidation firmly takes hold, provided that there are no adverse shifts in capital flows,” the IMF said.

The pace of future interest-rate cuts will depend on the ability of Prime Minister Ivica Dacic’s 11-month old Cabinet to cut spending significantly and achieve fiscal consolidation, the Serbian central bank said on May 22. Cuts should come from reducing public administration, wage and pension reductions, while asset sales would boost revenue, the IMF said.

“We need an extreme cure, we need to swallow a bitter pill and explain to people that those measures will bring light at the end of the tunnel,” Deputy Prime Minister Aleksandar Vucic said in a live interview with B92 television in Belgrade today.

Rate Cut

Last month’s rate reduction echoed cuts across eastern Europe, where central banks sought to bolster economic growth. Rather than battling last year’s recession with rate reductions, Serbian central bankers tightened policy eight times in nine meetings through February as regulated price increases and rising dinar liquidity drove the inflation rate to a 12.9 percent peak in October.

The central bank wants to bring inflation to 4 percent plus or minus 1.5 percentage points by December, with the consumer-price index falling to the upper end of the target band by October, central bank governor Jorgovanka Tabakovic said on May 15. Inflation quickened to 11.4 percent in April from a year earlier, fueled by vegetable prices.

The central bank, which bought euros this year to slow dinar gains, was forced to change policy as the currency dropped to the lowest level against the euro in five months. That was a sign that the dinar is no longer immune to global developments, Societe Generale SA’s emerging-markets strategist Benoit Anne said in an e-mail on June 4.

The bank sold 10 million euros ($13.1 million) today after the dinar dropped to the lowest level since Dec. 13, defending the currency for a fifth straight session since May 30 at a combined cost of 85 million euros, according to its website.

The National Bank “seems to be defining a tight range” by buying euros at levels of about 110.50 dinars when the currency was rising and selling euros at about 113.20 dinars when it was falling, Anne said.

“It has to be seen whether the intervention flows” at levels of about 113 dinars to the euro “will stop the tide for the dinar,” Anne said.

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