Thursday, April 17, 2014

Serbia holds rate, sees room for cuts on lower deficit

    Serbia's central bank maintained its policy rate at 9.5 percent but said plans to cut the government deficit "will open up the scope for monetary easing, which should have a positive effect on the sustainability of economic growth."
    The Bank of Serbia (NBS), which has been intervening in foreign exchange markets to limit the rise in the dinar currency since the Progressive Party won a parliamentary majority in last month's election, said its decision to keep the rate on hold was "guided by instability in international financial markets and heightened uncertainties surrounding the current geopolitical tensions."
    The central bank has maintained its rate since December despite a decline in inflation, citing the need to keep Serbian assets attractive to international investors.
    The instability in financial markets may affect Serbia through a drop in capital inflows and higher prices in global commodities markets, including energy and agriculture, the NBS said, warning that EU countries may experience lower economic growth, which would dampen demand for Serbian exports.
    The central bank has maintained its rate since December despite a decline in inflation, citing the need to keep Serbian assets attractive to international investors.

     In 2013 the NBS cut its rate by 175 basis points as inflation declined in response to the bank's 150-basis-point increase in rates in 2012. Inflation averaged 7.7 percent in 2013 but NBS expects it to fluctuate around the low end of its tolerance range of 2.5 to 5.5 percent in coming months.
    In March Serbia's headline inflation rate fell to 2.3 percent from 2.6 percent in February but the central bank expects inflation to rise in coming months due to higher administered prices and the one-off impact of higher valued-added tax on some goods in January.
    The central bank targets inflation at midpoint of 4.0 percent and the IMF has forecast inflation of4.0 percent this year, 2015 and 2016.
    "The expected stepping up of fiscal consolidation and structural reforms will contribute to stabilizing inflation at low levels and preserving price and financial stability over the medium term, and will also reduce the exposure of the domestic economy to the exogenous risk," the central bank said.
    Last week the Serbian central bank intervened for three consecutive days to limit the gains in the dinar against the euro, the sixth time it had intervened Prime Minister-elect Aleksandar Vucic won a majority in the parliament on March 16, according to dealers.
    On Wednesday Vucic, whose cabinet is expected to be confirmed on April 27, said he would cut spending by reducing public sector jobs and ending subsidies.
    The Serbian dinar has been relatively stable this year, trading at 115.5 to the euro today, down 0.8 percent since the start of the year.
    So far this year the central bank is reported to have spent a total of 70 million euros in managing the dinar and on March 31 the bank's governor, Jorgovanka Tabakovic, said the NBS had enough reserves to defend the currency, noting foreign exchange reserves at 10.6 billion euros.
    Serbia's economy has been improving in recent months after a recession in 2012. In 2013 Gross Domestic Product expanded by 2.5 percent and the central bank has forecasts growth of 1.5 percent this year. The IMF has forecast 1.0 percent growth this year, up to 1.5 percent in 2015.


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