Central bank cuts rate to 10.75pc: Serbia

BELGRADE: Serbia's central bank cut its key interest rate as expected on Tuesday, by 50 basis points to 10.75 percent more than most analysts had forecast.

The bank, which had previously hinted at further easing, said it took the decision because inflation was declining steadily and aggregate demand remained low.

"The executive board expects that the September inflation will be at a single digit food prices are stabilised and the increase in state-regulated prices (has) slowed down," the bank said in a statement.

The bank also said future rate movements would depend on inflation, and risks associated with the implementation of fiscal policies and with the debt crisis in the euro zone.

A poll of 12 analysts by Reuters earlier this week had predicted a rate cut, although only two respondents forecast the rare would be lowered by 50 basis points. Six traders and analysts foresaw quarter-percentage-point cut, while another four expected the central bank to hold rates at 12.5 percent.

The bank, which in past weeks has indicated it will focus more on boosting growth and supporting employment, said low aggregate demand would continue to be a disinflationary factor.

In September, the bank cut its benchmark rate to 11.25 percent from 11.75 percent after holding it unchanged in August, citing lower inflationary pressures and aggregate demand.

Serbian CPI inflation in August eased to 10.5 percent, down from 12.1 percent in July. The central bank saw the downward trend continuing due to a good harvest and lower food prices, which is cored to Serbia's inflation index.

The bank last increased rates in April, by 25 basis points, due to heightened inflationary pressures.

The central bank also said Serbia's 1 billion euro ($1,33 billion) stand-by deal with the International Monetary Fund would be an anchor for macroeconomic and financial stability.

The IMF cut its 2011 growth forecast for Serbia in August, to 2 percent of gross national product from 3 percent and to 3 percent from 4.5 percent for 2012.

Under the loan deal, it also allowed the European Union applicant country to increase its 2011 budget deficit to 4.6 percent of GDP in 2011, from a previously agreed 4.1 percent.

Serbia hopes to win EU candidate status in October, which should provide a psychological boost for its financial markets.

A date for the start of accession talks is unlikely to be secured, however, owing to tensions and slow progress in mending ties with Kosovo, its former southern province whose ethnic Albanian majority declared independence in 2008.

Copyright Reuters, 2011