Serb central bank hikes rates to calm markets

By bne IntelliNews August 10, 2012

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Serbia's central bank surprisingly raised base interest rates and local currency reserve requirements for commercial banks on August 9, in a bid to offer some respite to the battered dinar, and to calm market fears over the direction of monetary policy since the resignation of four central bankers, including the governor.

The rate hike was the first since Jorgovanka Tabakovic took over as governor of the National Bank of Serbia (NBS) on August 7. The party-linked Tabakovic replaced Dejan Soskic, who was forced out by the new nationalist-led government as it seeks to tighten state control over the central bank

The central bank raised the benchmark one-week repurchase rate by 0.25 percentage points to 10.5%; it also raised the dinar portion of mandatory reserve requirements for commercial banks by 5 pp to 32% on assets of up to two years, and from 19% to 24% on longer-term assets.

Most analysts in a Bloomberg survey had expected the NBS to keep rates on hold, given the bleak economic outlook. The Serbian economy shrank 1.3% in the first quarter of the year, followed by a 0.6% drop in the second, and the central bank had already raised the benchmark interest rate by a total of 0.75 pp in June and July.

However, fear of rising inflation and pressure on the struggling dinar won out, with the NBS citing expectations of further rises in food prices, imports and state-regulated tariffs and fretting over "the country's increased risk premium." Inflation was running at 5.5% in June, at the top end of the bank's target of 4% plus or minus 1.5 pp. The bank has forecast inflation will peak in the first half of 2013, before returning to the target range.

Analysts say that while the move will do nothing to help pull Serbia out of recession, it should, albeit briefly, strike a chord with investors worried about a high inflation rate and the struggling currency. The dinar is Europe's worst-performing currency so far this year, having slumped 9.5% against the euro and hitting a record low on August 7. The rate hike saw it gain 1.6% against the EU single currency.

Trying to calm financial markets, Finance Minister Mladjan Dinkic pledged on August 8 to slash the 2013 budget deficit to below 4% of GDP, from around 7% for this year. He also said Serbia would seek a new loan deal with the IMF, though the lender has warned that the row over Soskic would have "consequences" for a new funding programme.

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