Serbia Cuts Rates for Third Month as Inflation at Record

Serbia’s central bank lowered borrowing costs for a third straight month as inflation slowed to a record low amid a deteriorating economic outlook.

The Narodna Banka Srbije in Belgrade, the capital, cut its one-week repurchase rate by a half point to 9.5 percent, according to a statement on its website today. Six of 22 economists in a Bloomberg survey predicted a quarter-point cut, seven projected a half-point reduction, two forecast a decrease of 75 basis points and seven predicted no change.

The decision aligns Serbian policy makers with counterparts in eastern Europe from Romania to Hungary who are reducing the cost of credit to revive their economies. The Serbian central bank, which a month ago downgraded its forecast for next year’s economic growth, last cut the benchmark rate by a half point on Nov. 7, when it cited subsiding price pressures and inflation expectations for the move.

Rate setters have concluded that “inflation expectations have fallen to a historical minimum and that inflation will stay within the target band in the coming period,” according to the statement. “The expected effects of fiscal consolidation, besides having a disinflationary impact, will also contribute to reducing the impact” of external risks.

Inflation slowed to a record-low 1.6 percent from a year earlier in November, below the central bank’s target of 4 percent, plus or minus 1.5 percentage points.

The dinar traded 0.1 percent weaker at 115.0050 against the euro after the announcement in Belgrade, data compiled by Bloomberg show.

Policy Swings

Serbia embarked on an easing cycle in May after tightening policy eight times in nine meetings through February as regulated price increases and rising dinar liquidity drove up inflation. With five rate cuts in the past eight months, the central bank shaved 2.25 percentage points off its benchmark rate.

The central bank expects inflation to remain close to its 4 percent target through 2016, according to today’s statement.

Policy makers cut their economic growth forecast for 2014 to 1.5 percent on Nov. 19 from a 2.5 percent estimate made in August. The government adopted the 2014 budget on Dec. 13 with a planned fiscal gap of 7.1 percent of gross domestic product, the highest among southeastern European economies.

Serbia has pledged a fiscal consolidation plan of 1.6 billion euros ($2.2 billion) through 2016. One-time spending items to overhaul state companies and prop up some commercial banks will widen the 2014 deficit from 6.5 percent this year.

A stronger-than-expected dinar alongside the downgraded GDP outlook and the recent surprise inflation slowdown suggest even bigger rate cuts lie ahead, analysts at Hypo Alpe Adria Bank d.d. in Zagreb said in a Dec. 16 research note.

“Low inflation warrants a cautious cut of what is currently the highest policy rate in the CEE,” Dan Bucsa, an economist at UniCredit Bank AG in London, said in a note to clients yesterday.

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