The Belgrade-based Narodna Banka Srbije will leave its two- week repurchase rate unchanged at 12.5 percent when it meets on May 12, according to 10 of 21 economists. Seven see the bank raising the rate by a quarter-point and three expect an increase to 13 percent. One predicts a cut to 12.25 percent.
Global rate setters are struggling to contain inflation as the world economy gathers strength and food and oil prices rise. The European Central Bank raised interest rates last month for the first time in almost three years. ECB President Jean-Claude Trichet said yesterday the world’s central bankers are united in fighting inflation fueled by surging commodity prices and fast- growing emerging economies.
“The dinar has appreciated substantially since the start of the year and I do not see any reason for further policy tightening,” Dusko Vasiljevic of the Belgrade-based Ceves economics research institute said in a phone interview.
The dinar, which has gained almost 7 percent this year, was trading at 99.24 to the euro at 2:15 p.m. in Belgrade, according to Bloomberg data.
Weak domestic consumption, which is “25 percent below pre- recession levels,” rather than inflation, is the main concern for the economy, Vasiljevic said. There is little evidence of domestic demand picking up “after 200,000 people in the formal economy or 10 percent of all employed persons, lost their jobs during the crisis.”
Inflationary pressures may subside during the middle of the year as a result of base effects, he said.
Inflation Outlook
Serbia, which has raised its benchmark rate 4.5 percentage points since August, had an inflation rate of 14.1 percent in March. The rate is expected to rise to 14.5 percent in May, according the median estimate of a Bloomberg survey. April data is due May 12.
Inflation in Serbia has mainly been driven by food prices. The Serbian central bank has largely relied on the firming dinar to fight inflation since the start of 2011, with the double- digit benchmark rate attracting fresh capital inflows.
The stronger dinar hasn’t stopped price increases, “so you begin to wonder if inflation results from a lack of competition or a renewed increase in retail margins,” Ljiljana Grubic, a researcher at Raiffeisenbank in Belgrade, said in a phone interview. Grubic expects a cut by the central bank.
‘Rate Increases’
“Rate increases will only be lifting the cost of financing for the Serbian budget,” Grubic said, referring to government plans to step up borrowing in the local market after the sale of Telekom Srbija AD fell through. “The government will not be able to afford that high cost of debt.”
The failure to sell Telekom Srbije will affect Serbia’s “current account funding mix” this year, Hypo Alpe Adria Bank said in a note to clients yesterday. Hypo Alpe Adria is among those who still see a need for more rate increases as the government continues to raise regulated prices, including electricity and gas.
The government has pledged to raise prices under its control no more than 9 percent in 2011, central bank governor Dejan Soskic said in a May 7 interview with Belgrade newspaper Novosti.
Curbing inflation may be difficult in a pre-election year, when the government traditionally loosens spending. Serbia must keep its 2011 fiscal gap below 4.1 percent of gross domestic product to comply with the terms of a bailout loan from the International Monetary Fund, completed last month. For the latest updates PRESS CTR + D or visit Stock Market news Today
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