ECONOMY

Serbia’s inflation records a new 15-year low in December

BELGRADE – Serbia’s inflation fell to a 15-year low of 6.6 percent in December, undershooting the government’s revised year-end forecast and paving the way for more interest rate cuts, data showed yesterday. The headline rate slowed from 8.8 percent, coming in below the official 7.0-7.7 percent forecast and crowning a sharp decline from last year’s 17.7 percent, aided by the strengthening of the dinar currency and monetary tightening earlier this year. Single-digit inflation is new for a country still smarting from the hyperinflation of the 1990s. «A restrictive monetary policy as well as a responsible fiscal policy has achieved the goal and led to a significant reduction of inflation from last year’s 17.7 to only 6.6 percent this year,» the central bank said in a statement. The central bank in November started easing its policy to reverse the effects of an 18-month tightening that had pushed inflation to below the official target of 7-9 percent. This week it cut the key repo rate by 150 basis points to 14 percent, the fourth easing since November 1. Speaking after the move, bank governor Radovan Jelasic said the bank would consider more rate cuts if December inflation came close to 6.5 percent. Earlier cuts failed to ease the upward pressure on the dinar, driven to two year-highs by record privatization revenues and a widespread use of loans in foreign currencies that are converted into dinars in the domestic market. Key tool The strong dinar has served for much of the year as a key tool for cutting inflation by making imports, particularly of fuels, cheaper, and the central bank has cited the currency’s strength as a key factor allowing it to ease policy. Dusko Vasiljevic, economist with the Center for Advanced Economic Studies (CEVES) institute said, however, that low inflation came at a price. «The cost of such a drastic drop in inflation is a slowdown in economic growth, he said. «A restrictive monetary policy has negatively influenced economic growth which has shown signs of a slowdown in the third quarter and preliminary data for October and November indicate the slowdown is more serious.» Statistics office data showed on Thursday third-quarter economic growth slowed to 4.6 percent year-on-year from 5.6 percent in the second quarter, while industrial output inched up 1.4 percent year-on-year in November, after a 1.6 percent rise in October. Vasiljevic also predicted inflation will rise early next year because of the effects of recent monetary easing and an expected rise in budget spending and increases in regulated prices that were delayed until after the January 21 general elections. He also predicted the dinar would stabilize after its hefty gains in 2006.

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