Serbia Unexpectedly Cuts Rates for Second Month on Inflation

Serbia’s central bank unexpectedly cut its benchmark interest rate for a second month, overlooking a plunging dinar as inflation pressures subside. The monetary authority sold euros for a sixth day to prop up the currency.

The Narodna Banka Srbije in the capital, Belgrade, cut its one-week repurchase rate by a quarter point to 11 percent, matching the forecast of eight of 24 economists in a Bloomberg survey, according to a statement published on its website. Fourteen analysts predicted no change, with one forecast each for reductions to 10.75 percent and 10.5 percent.

“A further decline in annual inflation and inflationary expectations is certain in the coming months,” the central bank said in the statement. “The fall in year-on-year inflation will be sustained by the monetary policy measures taken thus far.”

Policy makers led by Governor Jorgovanka Tabakovic are looking past the dinar at the weakest in six months to join a global push for stimulus. In eastern Europe, Poland, Hungary and Belarus eased policy in the past two weeks to bolster lending and economic growth, while the Czech central bank is considering currency sales with rates at effectively zero.

The dinar traded at 114.1015 per euro at 5:01 p.m. in Belgrade after falling to 114.4205, its weakest since Dec. 11, 2012, according to data compiled by Bloomberg. That prompted policy makers to sell euros for the sixth consecutive day.

Bond, Stocks

The yield on Serbia’s 10-year dollar bond maturing in 2021 rose one basis point to 5.74 percent. Serbia’s benchmark BELEX15 stock index fell 0.3 percent to 498.37, declining for the sixth day to a six-month low.

Serbia first cut borrowing costs in 16 months on May 14, reducing the benchmark rate by a half point to 11.25 percent. Investors sold off the dinar and the country’s bonds after the International Monetary Fund said on May 22 that the budget deficit may reach 8 percent of economic output, more than double the initial target of 3.6 percent of gross domestic product, unless the government takes steps to narrow it.

The central bank is changing course after tightening 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.

‘Eliminate Uncertainty’

“Lower food prices in the new agricultural season, low aggregate demand and additional fiscal consolidation measures that will eliminate uncertainty with regard to the future economic policy,” it said in today’s statement.

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

Dinar “assets that initially seemed immune to international developments so far this year are now also under scrutiny with the National Bank of Serbia forced to regularly step in” to try and lessen the currency’s volatility, Societe Generale SA analysts including Benoit Anne and Guillaume Salomon in London said in a note to clients today.

The central bank spent 30 million euros ($40 million) to prop up the dinar today, boosting the cost of the currency’s defense to 115 million euros in the past six days, according to its website.

‘Risk Aversion’

Rate setters are convinced that “given the narrowing of the foreign trade and current-account deficits” the current dinar pressure can be attributed to “trends in international financial markets and greater investor risk aversion,” they said in the statement.

Serbian Deputy Prime Minister Aleksandar Vucic said yesterday that the government won’t rush with the measures before selecting the best policy mix.

The situation doesn’t need to “be problematic but it’s very important that Serbia energetically embraces reforms, sending the best signal to investors that the situation will stabilize,” he said.

Prime Minister Ivica Dacic’s 11-month old Cabinet should cut public spending by 2 percentage points of GDP to narrow the budget deficit through reducing public administration, lowering wages and pensions, along with asset sales to boost revenue, according to the IMF and the country’s budget regulator.

“It’s difficult to predict what we can expect in the weeks ahead,” Raiffeisen International Bank AG analyst in Belgrade including Ljiljana Grubic said. The predicted slowdown in inflation over the coming months is “not taking into account” that the dinar’s depreciation “usually passes through to retail prices very easily,” while central bank interventions “didn’t bring stability to the market.”

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