Serbia Unexpectedly Cuts Rate to Aid Economy After Floods

Serbia’s central bank unexpectedly lowered borrowing costs for a second month as inflation remained subdued after devastating floods in May brought the economy to a near standstill.

The National Bank of Serbia in Belgrade, the capital, cut the one-week repurchase rate to 8.5 percent from 9 percent after lowering it by a half point last month, according to a statement on its website today. Only one of 22 economists in a Bloomberg survey predicted the move, 17 forecast no change and four saw a quarter-point cut.

The worst floods in more than a century added strain to an economy that’s already been sputtering, with inflation remaining below the central bank’s target band of 2.5 percent to 5.5 percent in 2014 as domestic demand faltered. The government of Premier Aleksandar Vucic has to contend with damage of at least 1.5 billion euros ($2 billion), according to the European Bank for Reconstruction and Development.

“The decision was based on the assessment that the year-on-year inflation rate would continue to revolve around the lower bound of the target tolerance band and that the recent flooding would not lead to an increase in inflationary pressures,” the central bank said in the statement. “The risks from the international environment also subsided, partly in response to increased monetary policy accommodation on the part of the ECB.”

The dinar, which has weakened 0.7 percent against the euro this year, traded 0.2 percent stronger at 115.4009 per euro at 12:21 p.m. in Belgrade, data compiled by Bloomberg show.

Stable Dinar

Serbian policy makers led by Governor Jorgovanka Tabakovic refrained from rate cuts in the first four months of 2014 after chopping 2.25 percentage points off the benchmark rate between May and December last year.

“Both headline and core CPI have been on a firmly downward slope since January 2013,” Dragoslav Velickovic and Roxana Hulea, analysts at Societe Generale SA, said in an e-mailed note today before the announcement. “As long as fiscal consolidation grinds on and CPI expectations remain on track, the NBS has room for measured monetary policy easing.”

Inflation was at 2.1 percent in May, unchanged from April, the country’s statistics office said today. Rate setters said on May 14 that they saw price growth close to the lower end of the range through June before an uptick in the second half.

Economy Slumps

Gross domestic product expanded 0.4 percent in the first quarter, down from 2.7 percent in the previous three months, according to a flash estimate published April 4. Economic output may shrink 1.5 percent this year, Miladin Kovacevic, a deputy chief of the statistics office, said on June 3. The central bank projects GDP will expand 1 percent, following a 2.5 percent gain in 2013.

Serbia wants to strike a new deal with the International Monetary Fund, whose mission won’t visit the country before fall, after the authorities “formulate a policy agenda” and assess the flood damage, the Washington-based lender said last month.

The government needs to save about 1.5 billion euros through 2017, including 400 million euros this year, to convince the IMF to support a new deal. The previous one was suspended in 2012 when the country overshot fiscal targets.

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