Serb Central Bank Lowers Rates as 2014 Economic Outlook Dims

Serbia’s central bank cut borrowing costs for the second straight month, taking advantage of slowing inflation days after the government’s 2014 draft budget signaled a weaker economic outlook.

The Narodna Banka Srbije in Belgrade, the capital, cut the one-week repurchase rate by a half point to 10 percent, according to a statement on its website today. Nine of 24 economists in a Bloomberg survey predicted a quarter-point cut, four saw a half-point reduction and 11 predicted no change.

Serbia is joining a regional round of monetary easing as central banks from Romania to Hungary reduce the cost of credit to revive their economies and their Czech counterparts start the first koruna sales in more than a decade to relax policy. Serbia last cut its benchmark rate on Oct. 18, with the central bank citing confidence in the government’s fiscal restraint amid appreciation pressures on the dinar, which has prompted the regulator to buy euros to stem currency gains.

“As inflationary pressures and inflation expectations continue to subside, the Executive Board expects year-on-year inflation to fall close to the lower end of the target tolerance band in October,” policy makers said in the statement. “Inflation being already at a low level, future monetary policy measures will be geared at keeping it within the target tolerance band.”

Weaker Dinar

The dinar traded 0.2 percent weaker at 114.2235 per euro at 1:23 p.m. in Belgrade, according to data compiled by Bloomberg. The Serbian currency has weakened 0.7 percent against the euro during the past 12 months.

Two cuts in three weeks that shaved 1 percentage point off the key rate may be followed by another one on Dec. 12 when rate setters meet again, Eldar Vakhitov, an emerging-markets economist at Barclays Plc in London, said in an e-mail.

“I think they could well cut by another 50 basis points in December,” he said. “It depends also where they want to see their policy rate in the end -- 9 percent could be the bottom, given also that inflation is close to flattening out.”

The inflation rate fell to a 16-month-low of 4.9 percent in September, returning to the central bank’s target tolerance band for the first time since June 2012. The monetary authority targets price growth at 4 percent, plus or minus 1.5 percentage point, this year and next.

Fiscal Outlook

The government projects 2014 economic growth at 1 percent, according to the draft budget, compared with a 2 percent forecast by the International Monetary Fund and a maximum 0.5 percent estimate by the Fiscal Council, a three-member body appointed by parliament to oversee budgetary compliance.

“The expected effects of fiscal consolidation and positive developments in international financial markets will contribute to keeping year-on-year inflation within the target tolerance band” in 2014, the central bank said.

Serbia has pledged a three-year fiscal consolidation of 1.6 billion euros ($2.2 billion) through 2016. Savings in the consolidated budget of 0.1 percent of gross domestic product will be equivalent to about 30 million euros. One-time spending to overhaul state companies and prop up some commercial banks will push the 2014 deficit to 7.1 percent of GDP from 6.5 percent this year.

A rate cut “is a sign that the central bank is convinced the government will implement fiscal consolidation measures,” Ljiljana Grubic, an economist at Raiffeisen Bank AD in Belgrade, said by phone today. “But it’s also a sign that economic growth next year will be a greater problem than this year.”

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