ECONOMY

Serb central bank cuts key policy rate, citing outlook on inflation

BELGRADE – Serbia’s central bank yesterday cut its key policy rate by a full percentage point, citing an improved inflation outlook and prospects that the dinar currency would continue to strengthen. The bank’s monetary board lowered the two-week repo rate to 13 percent, in its fifth easing in less than three months. «Based on latest forecasts for this year, inflation is expected at the lower end of the inflation corridor (of 4-8 percent), even with less restrictive monetary policy,» a bank statement said. The bank began cutting rates on November 1 after it became clear that Serbia would undershoot the official 7-9 percent inflation target for 2006 largely with the help of a strong dinar which gained about 9 percent last year. At the end of last year, inflation fell to a 15-year low of 6.6 percent from almost 18 percent a year earlier. Central Bank Governor Radovan Jelasic said the dinar’s gains were set to continue dampening price growth this year. «There is an overall positive trend of falling inflation, both headline and core, and the pressure on the dinar has eased. But the dinar’s appreciation has yet to feed through,» Jelasic told a news conference. The bank said the currency, which last week recovered most of the ground it lost in the runup to the January 21 general election, had room for more gains. «The monetary board finds it possible that nominal and real appreciation (of the dinar) can continue and economic growth may slow down even though there are no visible signs yet of such a slowdown,» it said in the statement. Dealers said that even after the cut, which brought the total easing to 500 basis points, the dinar still looked attractive for foreign investors. «Big foreign players have no reason to be discouraged. Even the 13 percent rate and a relatively stable dinar leaves them a decent 6 percent profit,» one currency dealer said. The bank intervened to slow the dinar’s rise last year, but when a spike in corporate demand for euros and nervousness ahead of the election hit the currency earlier in January, it stepped into the market to stop it from falling too much. The dinar bounced back and traded near its two-year highs set last December after the January 21 vote. It traded at around 78.70/78.80 to the euro yesterday, with dealers citing demand coming mainly from the NIS oil and Srbijagas gas monopolies. Jelasic said main inflation risks for 2007 included expansive fiscal policy in the final quarter of 2006, and delayed electricity and central heating price hikes. Lower oil prices may help offset electricity and heating price hikes, the bank’s chief said, while its plan to issue a new tranche of one-year dinar-denominated savings bonds aimed to ease the inflationary impact of a loose budget. Analysts say lengthy coalition negotiations may also become a problem if talks drag for months and Parliament adopts the previous government’s expansionary 2007 fiscal plan. The inconclusive election left Radical Party nationalists with the biggest support, but no partners and a divided pro-Europe reformist camp facing difficult talks to form a stable coalition. Jelasic played down the impact of coalition talks on inflation, saying they were more likely to affect Serbia’s credit rating. «The future credit rating practically hangs on politics, not on the state of the economy,» Jelasic said. (Reuters)