Near-zero inflation, an economy in contraction and the safety net of an IMF loan deal may give Serbia’s central bank cause to cut interest rates for the first time since November when it meets on Thursday.
Seven of 14 bankers and analysts polled by Reuters this week and last predicted the bank would cut its benchmark rate, the highest in the region, by between 25 and 50 basis points, trying to ward off deflation and prop up an economy forecast to contract for a second year running.
Seven others, however, said the rate would remain at 8 percent, citing a shallow currency market and an overnight interest rate on dinar deposits that remains higher than the benchmark at 8.05 percent.
“I don’t see the central bank cutting the rate … until the market is consolidated,” said Branko Srdanovic of the Belgrade-based consultancy Associates Treasury Solutions.
“More dinars on offer would lead to lower interest rates on the … market, and only then will the central bank have the scope to cut rates,” said a dealer, who declined to be named.
The bank, however, will weigh that against annual inflation at a record low of 0.1 percent in January, monthly deflation of 0.2 percent, and an economy forecast to contract 0.5 percent this year having shrunk 1.8 percent in 2014.
Serbia also secured a 1.2 billion euro ($1.3 billion) precautionary loan deal with the International Monetary Fund in February, which has helped to stabilize the dinar and provides an anchor for tough public sector spending cuts promised by the government and aimed at reaping 1.3 billion euros by 2017.
The IMF said it saw scope for the central bank to cut rates in order to boost lending.
“Deflation, negative growth and the IMF’s position about rate lowering have led us to forecast the rate cut,” the trading department of Erste Bank’s Serbian arm said in an email.
Serbia’s dinar, kept in managed float by the central bank, has lost around 1 percent versus the euro this year.
Median forecasts from dealers and traders polled by Reuters put the dinar at 121 per euro in March and 121.43 in April.
Source; Reuters
