Serbia Cuts Rates to Kindle Inflation Before Early Election

Updated on
  • Central bank cuts rates after holding them steady for 3 months
  • Inflation remains below bank's target since Feb. 2014

Serbia’s central bank cut borrowing costs to a record, resuming policy easing after a three-month pause as it tries to kindle inflation and bolster growth before early parliamentary elections this spring.

The National Bank of Serbia cut its one-week repurchase rate to 4.25 percent from 4.5 percent on Thursday, it said in a statement on its website. Two of 24 economists surveyed by Bloomberg predicted a quarter-point reduction. The rest saw no change.

With the rate cut, policy makers shifted from expressing caution over emerging-market turmoil and returned to efforts to accelerate price growth that’s remained below their target for two years. The central bank has struggled to both keep the dinar stable and encourage more domestic lending amid wage and pension cuts enacted by Premier Aleksandar Vucic’s government under an agreement with the International Monetary Fund.

The rate decision was based on “weak inflation expectations and lower cost pressures,” the bank said in the statement. The global economic slowdown could have a “negative impact on global demand and economic growth, especially the pace of recovery in the euro area, our main trade partner.”

The central bank also narrowed the band for its deposit and lending rates to plus or minus 1.75 percent from 2 percent as it tries “to stabilize interest rates in the domestic money market,” it said in the statement. Inflation will start picking up in the middle of this year and return to the bank’s target range of 2.5 percent to 5.5 percent late this year or in early 2017, it said.

Fiscal Consolidation

The dinar traded 0.1 percent weaker at 122.8988 against the euro at 2:05 p.m. in Belgrade, according to data compiled by Bloomberg. The currency has weakened 1.1 percent to the euro this year. The yield on Serbia’s dollar bonds maturing in 2021 rose three basis points to 4.767 percent.

The rate cut comes “amid elevated external geopolitical risks” as well as a “challenging public sector agenda ahead, still weak economic cycle and frail non-resident appetite for locally-placed debt,” analysts at Raiffeisenbank in Belgrade said in a note to clients. “The market will be even more cautious after today’s decision” and the country remains vulnerable to currency risks, they said.

Budget risks include delays in shrinking the number of public-sector workers and debts by some big, money-losing companies, according to the Fiscal Council, a three-member watchdog that monitors the budget.

The central bank sold 290 million euros ($325.67 million), or close to 3 percent of its reserves, in the foreign-exchange market in January to stem dinar declines, citing loan impairments at banks, global market turbulence and seasonal energy imports.

(Updates with analyst comments in seventh paragraph.)
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