Serbia’s central bank faces a tough choice whether to cut or hold its main interest rate next Tuesday, balancing between external risks, the formation of a new government after April’s election, low inflation and a stable dinar, a Reuters poll showed.
Of 17 dealers and analysts polled by Reuters this week and last, eight said the bank would keep the benchmark rate at 4.25 percent. Nine saw a 25 basis-point cut.
The central bank last cut the rate on Feb. 11, by 25 basis points to 4.25 percent. It then kept it on hold in March and April citing a slowdown in the global economy.
But low inflation, which in April stood at only 0.4 percent, well below the target of 2.5 to 5.5 percent, and the relative stability of the dinar against the euro may warrant a cut.
The spread between BELIBOR, the rate on dinar deposits in the interbank market, currently between 2.86 percent and 3.54 percent, and the central bank’s main rate could also play a role, said Branko Greganovic, the Chief Executive Officer of Serbia’s branch of the NLB bank.
“They will likely cut the rate to around 4 percent, maybe even more aggressively … the gap between rates is big and there’s no reason for it not to be narrower,” Greganovic said.
The formation of a new government may also loom large in central bank thinking.
The bank could opt to wait until the new administration is appointed, tentatively expected in June, on the view that a rate cut before then may deter foreign investors from holding Serbian assets, economists said.
Others say that the ruling Serbian Progressive Party’s victory in the April 24 vote should reassure portfolio investors.
Prime Minister Aleksandar Vucic has said his new government will proceed with reforms in line with a 1.2 billion euro ($1.36 billion) loan deal with the International Monetary Fund, which will also help lead the country towards European Union membership.
Investors and creditors believe more reforms are needed to reduce the budget deficit, cut debt and downsize the bloated public sector. In one such step, the government sold the loss-making Zelezara Smederevo steel mill to China’s Hebei Iron & Steel Group in April.
The central bank has repeatedly said it will maintain a cautious monetary policy due to low inflation, which is expected to return to within the target range by the end of 2016 or early 2017. ($1 = 0.8834 euros) (Editing by Giles Elgood and Hugh Lawson)
Source; Dailymail
