Serb dinar level may lead to more rate cuts

BELGRADE – The current level of the Serb dinar could justify a further cut in the country’s key policy interest rate, Serbian central bank chief Radovan Jelasic said yesterday. «At this level of the dinar exchange rate we are much closer to an additional lowering of the repo rate than to an increase, but it all depends on core inflation,» Jelasic told a news conference. The dinar has been underpinned by strong euro liquidity as investors enter the market to buy bank assets through ongoing share issues. It was trading at 79.6/euro yesterday, not far from a two-year high of 78.25/euro in December. Core inflation fell to 4.0 percent in March from 4.7 percent in February – the lower end of the central bank’s 4-8 percent targeted band for 2007. Serbia cut its key policy rate by 100 basis points to 10.5 percent last month on concerns it could undershoot its inflation objective for two years in a row. It has cut the rate by a total of 750 basis points in the last six months. «Following the (March 28) rate cut there were signs of some dinar weakening, but it has firmed since then… The repo stock has slightly declined and it’s not hard to imagine what our next step will be if the dinar stays at these levels,» Jelasic added. The narrower spread between the dinar and eurozone interest rates was hoped to weigh on investors’ appetite for Serbian repos, but the outstanding stock inched down to -1.9 billion from -2.05 billion last month. Jelasic said the dinar has showed resilience to political uncertainty even though the country is still without a government since an inconclusive January 21 election. He said he did not expect ongoing coalition talks to bring about sharp price movements. «Political stability would be the key for the longer term and it would be useful to know the course of future reforms in Serbia,» Jelasic said, adding that with stable politics Serbian interest rates would be below their current 10.5 percent level. The International Monetary Fund has repeatedly urged a new Serbian government to commit to low inflation, shed all traces of protectionism and fully embrace structural reforms if it wants long-term sustainable growth.

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