Serb central bank cuts rate on inflation
Serbia's central bank unexpectedly cut its key interest rate to a record, taking advantage of a strong dinar and below-target inflation to aid the economy as the government pursues fiscal cuts negotiated with the International Monetary Fund.
The National Bank of Serbia lowered its oneweek repurchase rate to 5.5 percent from 6 percent after keeping it unchanged in July, according to a statement on its website Thursday.
Two analysts said the benchmark would be cut to 5.75 percent, while 18 forecast no change. Four consecutive rate cuts between March and June have failed to rev up inflation, which has remained below the central bank's target range of 2.5 percent to 5.5 percent since February 2014. It's set to start moving toward the target band after slowing to 1 percent from a year earlier in July, led by higher regulated prices and the low base effect, the central bank said on Wednesday.
Rate setters "took into consideration the disinflationary impact of most domestic factors, low inflation in the international environment and stabilized inflation expectations within the target band," according to the statement.
The dinar's gains have prompted policy makers to intervene in the currency market by buying a combined 190 million euros ($211 million) since their last rate meeting in July to stem the appreciation. The Serbian currency has added 0.2 percent against the euro in the past month, compared with declines for its regional peers in Poland and Hungary, according to data.
The dinar was little changed at 120.0441 to the euro as of 12:11 p.m. in Belgrade. The yield on Serbia's dollar bonds maturing in 2021 fell one basis point to 4.854 percent. "There's room for rate cuts," Branko Srdanovic, a partner at Belgrade-based Associates Treasury Solutions, said before the announcement. "With inflation at only 1 percent, they really don't need interest rates of 6 percent."
As Serbia moved to resume monetary easing, it remains susceptible to spillovers from developments in Greece, whose lenders account for more than 12 percent of the former Yugoslav country's banking assets. Central banks in emerging economies are also bracing for the first U.S. rate increase in almost a decade and the risk it will spur capital outflows and sap investment. The International Monetary Fund advised Serbia to carry out more "gradual monetary easing" as inflation remains slow and the government cuts costs to narrow its budget gap, according to a June 26 report.
Prime Minister Aleksandar Vucic is trying to restart growth in an economy that's suffered three recessions since 2009. He's relying on a recovery in industrial output after last year's floods devastated power-generation facilities and soaked farms. At the same time, the government is maintaining a lid on public wages and pensions and using one-time non-tax revenue to narrow Serbia's budget shortfall.