Serbia Surprises With Second Rate Cut as Concerns Rise on Growth

(Bloomberg) --

Serbia unexpectedly cut its key interest rate for a second straight month, opting to help lift economic growth while inflation remains tame and the dinar faces appreciation pressure.

The central bank reduced the benchmark rate by a quarter point to a record-low 2.5% Thursday, their second such decision after keeping borrowing costs on hold for more than a year. Most economists in a Bloomberg survey had expected no change, with only two of the 24 predicting the move.

Policy makers based the decision on a new mid-term inflation projection, as well as moves by big global central banks including the U.S. Federal Reserve and the European Central Bank to loosen monetary conditions, according to a statement.

“The NBS is providing additional support to credit and economic growth,” the bank said in the statement. “Inflation will be firmly under control, as in previous years, and will continue to trend within the bounds of the target tolerance band.”

With last month’s rate cut by the Fed providing room to maneuver, central banks across Asia have also taken stronger steps this week to counter global economic risks. India, New Zealand and Thailand lowered rates on Wednesday, each taking more aggressive action than economists had predicted.

Concerns over Serbia’s economic expansion have intensified after the Statistics Office failed to publish its flash growth estimate last week, citing problems in gathering the data.

Industrial production and exports declined in the first half and gross domestic product growth slowed to 2.5% from January to March compared with a year earlier. Combined with decelerating growth in the European Union, those factors have put the government’s full-year growth estimate of 3.5% at risk.

With inflation at the lower end of the central bank’s 1.5% to 4.5% target range, policy makers may still have potential room to lower borrowing costs without fear of stoking runaway price growth. The dinar is also under appreciating pressure, which has led to repeated interventions by the monetary authority on the currency market.

“Considering that the slowdown of the domestic economy is largely generated by external factors, by the slowdown in the euro zone and their export demand for domestic products, the question arises about effects of the additional drop in interest rates,” Raiffeisen Bank’s Serbian unit said in an email.

The dinar was little changed against the euro after the decision. The yield on Serbia’s euro-denominated bonds maturing in 2029 slipped less than one basis point to 1.36%.

To contact the reporter on this story: Misha Savic in Belgrade at msavic2@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Michael Winfrey, Andras Gergely

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