Serbia Holds Rates in First Policy Decision After Cabinet

Serbia’s central bank kept borrowing costs unchanged for a third month as inflation slows and Prime Minister Ivica Dacic’s revamped cabinet prepares to overhaul public finances and kick-start the economy.

The Narodna Banka Srbije, based in the capital, Belgrade, left its one-week repurchase rate at 11 percent, it said on its website today. Eleven of 24 economists in a Bloomberg survey predicted no change, 11 forecast a quarter-point reduction and two saw a half-point cut.

“Inflationary pressure continued to subside on lower food-production costs caused by a favorable agricultural season in the country as well as globally,” the bank said in an e-mailed statement. Inflation will return to the target range of 4 percent plus or minus 1.5 percent next month, it said.

The poll-leading Serbian Progressive Party, led by former nationalists, and the Socialists of Prime Minister Ivica Dacic brought in former McKinsey & Co. associate Lazar Krstic last week to serve as finance minister. They replaced Mladjan Dinkic after economic growth slowed to 0.7 percent from a year earlier in the second quarter from 2.1 percent in the first.

The dinar traded 0.3 percent weaker at 115.3018 per euro at 1:39 p.m. in Belgrade, data compiled by Bloomberg show. Yields on dollar-denominated state debt due 2021 fell 6 basis points, or 0.06 percentage point, from yesterday to 7.343 percent.

Economic Recovery

The Balkan nation’s economy is on the mend after two recessions in three years, buoyed by rising exports and growing agricultural output. The central bank is forecasting gross domestic product will increase 2 percent in 2013, accelerating to 2.5 percent next year.

The recovery that began late last year “has continued with a significant reduction in external imbalances, rising exports and bigger industrial output,” the bank said today.

The decision to keep the rate unchanged is also based on external factors such as increased risk aversion on capital markets after a possible reduction in U.S. monetary stimulus, it said. The central bank reduced borrowing costs in May, then left them unchanged in June and July.

The benchmark will probably be cut in the coming months “to follow the falling inflation rate,” Milutin Milojevic, a director for asset management and financial markets at NLB Banka AD, said in an e-mailed comment. Policy makers held off for now because of pressure on the dinar and “a lack of clarity” about the new cabinet’s fiscal policy.

IMF Pact

Serbia is under pressure to shrink spending and clinch a new agreement with the International Monetary Fund to backstop its public finances and restore investor confidence. The fund, which refused to discuss a new deal in May after the nation slipped on its fiscal commitments, urged restraint in policy easing while fiscal consolidation is implemented.

The government needs to narrow the budget deficit, which may reach 5.1 percent of GDP this year, above an already revised target of 4.7 percent, Fiscal Council Chairman Pavle Petrovic told state-run broadcaster RTS late yesterday. Krstic sees the gap at 6.5 percent.

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