Serbia’s First Recession Since NATO Bombing May Prompt Rate Cut
By Aleksandra Nenadovic Oct. 2 (Bloomberg) -- Serbia’s central bank will probably cut the benchmark interest rate, the highest in Europe with Iceland, this quarter as the economy sinks deeper into its first recession since NATO bombed the Balkan nation a decade ago. Policy makers, who have kept the <http://www.bloomberg.com/apps/quote?ticker=SEKEPOL%3AIND> two-week repurchase rate at 12 percent since July, may lower it to 11 percent by year-end, according to the median forecast of 8 economists surveyed by Bloomberg. Central bankers will next discuss rates on Oct. 8. The government of the former Yugoslav republic was forced to seek aid from the <http://www.imf.org> International Monetary Fund to prop up the economy, which is contracting for the first time since the 1999 North Atlantic Treaty Organization bombing destroyed most its infrastructure. The campaign was aimed at forcing Serbian troops to withdraw from Kosovo and end the persecution of mainly Muslim ethnic Albanians in the territory. “The economy is in such a bad shape that a bit of loosening can’t hurt, especially with inflation in check,” <http://search.bloomberg.com/search?q=Vladimir+Vuckovic&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1> Vladimir Vuckovic, an analyst at <http://www.ekonomija.org> ekonomija.org, said by phone. Eighteen of the 53 central banks tracked by Bloomberg have cut interest rates since Serbia last lowered borrowing costs on July 7. Neighboring Hungary and Romania did so this week. The Narodna Banka Srbije has kept rates unchanged, awaiting government proposals to curb the budget deficit, driven wider by waning tax revenue because of the recession, and unlock the next installment of its $4.3 billion IMF loan. Inflation Slows The economy may shrink 4 percent this year, according to the IMF. Falling consumer demand helped bring down the annual inflation rate to 7.1 percent in September, the lowest in more than two years. The economy shrank an annual 4 percent in the second quarter after a 4.2 percent contraction in the first. Central bank Governor Radovan Jelasic, who last month urged the government to take further measures beyond the job cuts, has said policy makers need to see the budget plans before reducing rates. A potential increase in electricity prices may boost the inflation rate from January, he has said. The resulting price pressure means that once monetary easing restarts, the scope may be limited, analysts said. “There is still inflation pressure that will keep policy makers from cutting the rates to less than 11.5 percent or 11 percent by year-end,” said <http://search.bloomberg.com/search?q=Alen+Kovac&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1> Alen Kovac, an economist at the Croatian unit of Erste Group Bank AG. The inflation rate will reach 9 percent at the end of the year, meeting the target set by monetary policy makers, the IMF and the government, Jelasic said on Sept. 4. Serbia pledged to keep the rate between 8 percent and 10 percent this year to qualify for the bailout loan. Deficit Plan The IMF allowed Serbia to raise its deficit target for this year to 4.5 percent of gross domestic product from 3 percent. The government, which wants to avoid raising taxes, plans to cut public administration jobs to reduce spending. A delay in the next installment from the IMF would derail rate-cut plans and may force policy makers to raise borrowing costs, analysts said. “If the problems with the IMF continue, we can expect rates to rise,” said <http://search.bloomberg.com/search?q=Miroslav+Zdravkovic&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1> Miroslav Zdravkovic, a Belgrade-based economist with Serbia’s Economic Institute. Barring a delay in the transfer of funds, he expects the benchmark rate to fall to as low as 10.5 percent by year-end. A continuing dispute would also put pressure on Serbia’s currency, which has stabilized since the loan agreement between the government and the IMF in March and the disbursement of the first payment, the Economic Intelligence Unit said on Sept. 8. The dinar has gained 3 percent since reaching a record low in January and traded at 93.13 per euro yesterday. The benchmark Belex 15 stock index has declined for five consecutive days, paring this year’s gain to 45 percent. To contact the reporter on this story: <http://search.bloomberg.com/search?q=Aleksandra+Nenadovic&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1> Aleksandra Nenadovic in Belgrade at <mailto:[email protected]> [email protected] Last Updated: October 1, 2009 18:00 EDT http://www.bloomberg.com/apps/news?pid=20601085&sid=a2yY_abaR5ig
