Serb cen­tral bank cuts rate on in­fla­tion

The Pak Banker - - COMPANIES/BOSS -

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.

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