Serbian rate hike may not suffice

BELGRADE – Serbia’s central bank will follow up this week’s massive three-percentage-point interest rate rise with further hikes if necessary over the next three months, Governor Radovan Jelasic told Reuters yesterday. Core inflation overshot the 3-6 percent target in February, hitting 6.5 percent, while headline inflation soared to 11.3 percent, nearly double what the government planned for 2008. «We are aware that we must take all the steps in the first and second quarter of the year so that core inflation falls within the target at the end of 2008,» Jelasic told Reuters. The bank raised its two-week repo rate on Thursday to 14.5 percent, its third policy tightening this year and the biggest since inflation targeting was launched in 2006. The move was seen as a «decisive message» by the market, which was expecting a much smaller hike. «The three-percentage-point rate increase is significant,» Jelasic said in a telephone interview. «But if needed, we will move on in the same direction.» He said rate hikes alone may not be sufficient to fight the political uncertainty caused by the fall of the government, coming on top of a slowdown in foreign investment and global risk aversion in financial markets. Political problems «It’s hard to achieve the goal. We are fighting external shocks, but we must also fight domestic problems,» he said. «Parliament has been dismissed, we have a caretaker government, the outlook on our credit rating is negative, crude oil is getting more and more expensive and so is food.» Standard & Poor’s cut its outlook on Serbia’s credit ratings this week after the coalition government collapsed last weekend, split over whether to pursue European Union membership or keep a hard line on Kosovo, which seceded last month with EU backing. S&P cut the outlook to negative from stable on risks that hardliners might win a May 11 election, freezing EU progress. «No one should be surprised to see additional measures,» Jelasic said, but declined to elaborate. The measures so far have failed to move the dinar, which idled at 83.50/euro yesterday in lean market activity. Many bankers expect the bank to raise the reserve requirement, currently at 45 percent on hard currency deposits and borrowing, to clamp down on demand. It last changed the reserve requirement more than a year ago. The bank desperately needs a firm dinar to cut inflation. With its high pass-through to inflation, the current rate is believed to be adding 2-2.5 percentage points to core inflation. Jelasic said he believed the policy will ultimately get through to the market. «As a governor, I trust in the market,» Jelasic said. «If that had not been the case, the bank would have reached out a lot more for currency reserves to respond to this situation.» The central bank has spent between -5 million and -10 million a day through covert interventions for five weeks now, trying to add liquidity to the interbank market where banks refuse to unload their long euro positions. «We hope this situation will not last long and that things will settle down after the elections,» he said.

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