Thursday November 5, 04:41 PM
UPDATE 3-Recovery signs lead Serb rates down to 10 pct
By Gordana Filipovic
BELGRADE, Nov 5 (Reuters) - Serbia's central bank cut its key policy rate by a full point to 10 percent on Thursday, citing signs of economic recovery, tame prices, a stable dinar and the government's commitment to 5-year fiscal restraint.
Many analysts in a Reuters poll earlier this week had expected the bank to hold rates steady, but it was a close call and Serbia on Wednesday got a boost from the IMF's preliminary approval for the release of more of its agreed aid.
The economy ministry welcomed the rate cut and said that at 10 percent, the repo rate was likely to steer borrowing costs lower and free liquidity for cash-hungry companies.
The central bank has slashed its two-week repo rate by a total of 775 basis points in seven moves in 2009, trying to encourage banks to lend more to recession-hit companies. But banks have kept their cash in repos and treasury bills, instead.
'The monetary board unanimously decided to cut the benchmark rate partly because of the disinflationary impact of aggregate demand even though economic activity in the third quarter posted growth for the first time after more than a year,' Jelasic said.
While the bank still saw room for some policy easing, risks including still high inflationary expectations, recovering demand, regulated price hikes and higher global crude oil prices will limit the size of future cuts, he said.
Monthly inflation rates in Serbia have been negative for four months in a row, he said, leading the headline consumer price index down to 5.2 percent year-on-year in October. Full-year CPI (NYSE: CPY - news) was seen at 7.7 percent.
The latest Reuters poll showed a median forecast for CPI in October 2010 at 7.8 percent, close to the upper end of a 4-8 percent target range for the next year.
The economy is expected to have grown at a quarterly 4.1 percent rate in July-September, turning positive for the first time in more than a year, Jelasic said.
The full year economic decline was now revised to 2.8 percent from a previous estimate of 3.0 percent.
An expansionary fiscal policy -- one of the bank's key concerns -- was fairly under control, even though the government turned to more inflationary financing in the third quarter, by cutting down its deposits with the central bank instead of using more domestic debt issuance, Jelasic said.
But what mattered was the government's commitment to cut its spending on pensions and the public sector wage bill by 2015.
'Under the IMF deal, Serbia will cut spending on pensions to 10 percent of GDP from 13 percent, and the public sector wage bill to 8 percent from 10 percent,' he said. 'All this means that Serbia is on a path to recovery.'
The cut in the two-week repo rate has had little impact on the dinar, which has been resilient mainly due to low import-related demand. It has lost some 1.3 percent over the past week on growing demand for euros.
But it was still firmer in real terms, giving room for some more easing ahead, Jelasic said.
The improved economic outlook and commitment to fiscal restraint are likely to be viewed as positive by ratings agencies, but not the fast accumulation of public debt, Jelasic said.
Serbia has borrowed 1.1 billion euros in 2009, mainly in the home market. But only 10 percent of its total debt of close to a third of GDP is in dinars, prompting concerns that future debt servicing costs will grow as global interest rates rise in 2010.
(Editing by Ruth Pitchford) Keywords: SERBIA RATES/
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