Serbia May Be Tempted But It Won’t Cut Rates: Decision Day Guide

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Serbia May Be Tempted But It Won’t Cut Rates: Decision Day Guide
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(Bloomberg) -- Serbian central bankers will probably refrain from repeating last month’s interest rate cut on Thursday despite lingering concerns on the health of the economy.

After shocking investors with a surprise reduction in July, most economists polled by Bloomberg see policy makers keeping the benchmark rate at 2.75% on Thursday. Still, two of the 24 people surveyed see a quarter-point cut, saying developments within Serbia and a global round of monetary easing provide room for another move lower.

In particular, the Balkan state’s Statistics Office failed to publish its preliminary economic-growth estimate for the second quarter last week, citing problems in gathering the data. Industrial output numbers, which the office did release, showed a decline from a year earlier.

The failure “might indicate that the result was not as good as it was expected,” Ljiljana Grubic, an analyst at Raiffeisenbank’s Serbian unit, said in an email. “There is some room for a cut, but I wouldn’t expect it.”

With inflation at the lower end of the central bank’s 1.5% to 4.5% target range after slowing for three months, policy makers have room to further stimulate the economy without fear of stoking runaway price growth. The dinar is also under pressure to appreciate, prompting the central bank to repeatedly intervene in the currency market.

Another concern is the slowdown in the euro area, which has undermined demand for Serbia’s exports. The Balkan country’s economy is already expanding slower than forecast, growing 2.5% in the first quarter compared with the government’s 3.5% prognosis for the full year.

“Our base case is stability of rates. However, a further reduction by another 25 basis points is likely at the next meeting or by the year’s end,” Jakub Kratky, financial analyst at Generali (MI: GASI ) Investments in Prague, said in an email. “The possibility that the NBS will cut again on Thursday is relatively high as the NBS will have fresh macroeconomic forecast and also given the obvious economic slowdown suggested by most monthly data.”

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