Serbia central bank may keep key rate on rising inflation prospects

BELGRADE: Serbia's central bank is likely to leave benchmark interest rates unchanged this month as it contends with both rising inflation and a slowing economy, each caused by catastrophic floods in May, a Reuters poll showed.

Last month, the bank cut its benchmark rate, the highest in the region, by 50 basis points to 9 percent as inflation declined and the government pledged to cut spending. It later warned that the crisis in Ukraine could affect Serbia through rising food and energy prices.

In late May, floods inflicted as much as 2 billion euros ($2.72 billion) of damage on the economy, according to a European Bank for Reconstruction and Development assessment. The floods could cause an economic decline of up to 1.5 percent this year, but they could also push up inflation.

Eleven out of 13 traders and analysts polled by Reuters expect the bank to keep its benchmark interest rate at 9 percent on Thursday. Two saw a minimal 25 basis points cut.

"It is too early for another rate cut and inflation will (also) start to rise," said Srdjan Tomasevic of the Serbian arm of Erste Bank.

Inflation, mainly driven by food prices, stood at 2.1 percent in April, below the lower end of the central bank's target range of between 2.5 and 5.5 percent this year.

The statistics office is expected to publish May inflation data on June 12, but the full effects of floods on food prices will not be seen until July, analysts say. The poll showed June inflation rising to a median of 2.5 percent.

Timothy Ash, head of emerging markets research at Standard Bank in London, said he expects a rate cut. "I see a cut, maybe between 25 and 50 basis points ... on weak growth on floods," Ash said.

Serbia's planned talks with the International Monetary Fund have been delayed until autumn because of the still unclear effects of the floods. Also, the government has yet to reveal measures to cut spending and its budget deficit, reduce the size of the public sector and boost investments.

A deal with the IMF is seen as crucial to assure investors of the government's readiness to implement reforms and cut debt, now at about 63 percent of national output. They are also a condition for Serbia to win World Bank loans for budget support.

The Fund froze a previous deal with Serbia in 2012 because of overspending and rising debt.