Serbia’s central bank cut its key policy rate by 50 basis points on June 13, twice the reduction expected and another bold monetary easing move. The National Bank of Serbia (NBS) has now lowered rates by a full 100 bp in two months. The NBS is taking advantage of low inflation and easing pressure on prices, and taking account of the recent radical policy action by the European Central Bank (ECB). But the cut should also be seen in the context of May’s devastating floods, which caused Serbia’s fragile recovery to grind to a halt and has shaken domestic and international confidence in the newly-elected government.
The consumer price index rose just 0.1 per cent month-on-month in May, partly thanks to falling food prices. With the ECB’s easing pushing investors to a risk-on stance, the shaky Serbian dinar could climb due to its attractiveness in carry trades, further moderating inflationary pressures, regional bank Hypo AlpeAdria said in a note.
Last month’s flooding in the Western Balkans, the worst on modern record, caused at least €1bn damage in Serbia alone, according to government sources, and prominent economists in the public service have taken to the press and airwaves to forecast that Serbia will be pushed back into recession this year as a result. With the government’s scope for fiscal stimulus severely limited by a budget already expected to run up Europe’s biggest deficit this year (more than 7 per cent), monetary action may be seen as the easiest way to keep the economy moving.
And what of the outlook? Hypo suggests that the diminishing hope of an IMF deal, upwards movement of CPI in mid-autumn, Serbia’s double deficit and particularly its weak public finances will militate against another bold cut, and that the NBS has got its monetary punch in early. But a continuation of risk appetite and GDP shrinkage could give scope for another 50 bps cut. On the other hand, a new bout of global instability could force the NBS into reverse, hiking rates and intervening to prop up the dinar.
The new government was elected with a huge majority and enjoyed widespread investor goodwill due to its repeated commitment to privatisation and structural reform. But it has been hit by accusations of censorship of independent media – long a complaint of liberal critics – and a feeling that the previously forceful Prime Minister Aleksandar Vucic had an unsteady touch on the tiller during the flooding. The renewed economic hardship may make reform more difficult, though the government’s backers optimistically insist that post-diluvian Serbia has a new spirit, steeled for reform.
Source FT
