Serbia Holds Key Rate on Dinar Weakness, Austerity Delay

Serbia’s central bank kept its benchmark interest rate unchanged for a third month as it weighs dinar weakness and delays in government austerity measures against a shrinking economy.

The National Bank of Serbia in Belgrade, the capital, left its one-week repurchase rate at 8.5 percent, after lowering it by a cumulative 1 percentage point in May and June, according to a statement published today on its website. Eighteen of 23 economists in a Bloomberg survey predicted the move. Three forecast a quarter-point cut and two saw a half-point reduction.

Serbia’s economy will contract for the third time since 2009 this year after record floods in May soaked farms and damaged power plants. Prime Minister Aleksandar Vucic, whose five-month-old cabinet is set to tackle one of the widest budget deficits in Europe, is relying on investors from Russia, China and the United Arab Emirates for growth and jobs in the European Union candidate country.

Rate setters reacted to “ongoing uncertainty” at home and abroad, the bank said in its statement. “Geopolitical events and a less expansive monetary policy of the Fed could significantly influence developments in international capital markets, which can particularly affect emerging countries.”

The dinar, which has lost 3.7 percent against the euro this year, traded little changed at 119.07 per euro as of 12:09 p.m. in Belgrade, data compiled by Bloomberg show.

Serbia’s economy will shrink 0.5 percent in 2014 as the biggest former Yugoslav republic struggles to rebuild industry damaged by the floods, according to a revised central bank forecast released last month.

Bank’s Dilemma

The bank “faces the dilemma of reacting to poor growth numbers or to currency depreciation,” Dan Bucsa, an economist at UniCredit SpA in London, said this week in a note.

Vucic postponed the Sept. 8 announcement of an austerity package to discuss the measures with the International Monetary Fund’s resident representative. The plan is set to include public wage and pension cuts alongside measures to crack down on the shadow economy, improve tax collection and impose salary controls at state-owned companies.

The government will take extra time to draft the measures, which must protect the most vulnerable citizens, according to a statement released after the IMF discussions.

Finance Minister Dusan Vujovic, who took over after Vucic became premier on Apr. 27, has promised 1.5 billion euros ($1.9 billion) of deficit cuts over three years as the government ends years of supporting about 600 unprofitable companies and 90,000 workers with as much as $1 billion euros a year from the budget.

Measures to narrow the fiscal gap, now at 8 percent of economic output, are crucial for Serbia to qualify for talks with the IMF in the second half of October, Vujovic said. The Washington-based lender suspended its precautionary loan program in February 2012, when Serbia slipped on its fiscal performance before a general election that year.

Vucic’s Progressive Party, which is leading the government for a third year, has been promising to restart talks with the lender since August 2012.

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