Serb central bank governor wants to wait on rates

WASHINGTON (Reuters) - Serbian central bank chief Radovan Jelasic said on Sunday he would like to have more time for the latest interest rate increase to work through the financial system before taking further monetary action.

The bank raised interest rates a whopping 3 percentage points in one shot last month, lifting the benchmark interest rate to 14.5 percent in an attempt to prop up its currency, the dinar.

"We decided to have a stronger increase immediately instead of going by a step-by-step approach," Jelasic said in an interview with Reuters conducted on the sidelines of the spring meetings of the International Monetary Fund and World Bank.

"I can only talk for myself. My personal opinion is that after this substantial increase we need to provide some time to the market to adjust to this increase, first of all, before we take the next step," he said.

Jelasic said parliamentary and local elections on May 11 were overpowering, to a degree, the interest rate decision.

Current headline inflation as measured according to European Union standards is 12.5 percent, while official headline inflation was lower at 11.8 percent.

Jelasic reiterated that he thought the core rate of inflation, which stood at 7 percent in March, would fall back into its target range between 3 percent and 6 percent by the end of the year.

"In May of last year we didn't know about food, fuel, and elections. But I mean we definitely have to make sure we deliver on our promises regarding inflation targets," he said.

Serbia is considered to be fairly open to investment and foreign trade, but key sectors such as food processing, energy, and telecoms, are either controlled by the state or dominated by large local companies.

The dinar is down roughly 3.5 percent versus the euro since the start of the year and Serbia's main stock index has fallen by a third due to acute political tensions over the secession of Kosovo and increased risk aversion for developing markets.

But foreign direct investment flows continue to bolster the government's balance sheet, relieving some pressure on the current account.

"Thanks to the high FDI and possibility to draw loans from abroad, Serbia still sees its current account deficit financed and being secured. Of course for medium and long-term it will be much better that after the May 11 elections we enter into a new program with the IMF," he said.

IMF PROGRAM

Serbia's last lending agreement with the IMF ran out in the spring of 2006. but Jelasic said that the bank has relatively high foreign currency reserves of $15 billion -- seven months of import coverage -- while commercial banks hold reserves of $1.5 billion.

He said he wants to see a new program with the IMF and has had talks with the global lender. "Even if we would go into a program, for the time being it would not be more than a precautionary program, meaning without drawing down any money. That offers policy guidance and support," he said.

But unsettled domestic politics precludes starting serious negotiations with the IMF, he added.

He hopes the upcoming elections will bring some stability to the political scene so that real negotiations with the IMF can begin, reforms can move ahead and the government can add its influence in bringing down inflation.

The fragile coalition of nationalist and pro-Western parties collapsed over whether Serbia should pursue European Union membership despite EU support for the secession of Kosovo in February.

"If they (politicians) cannot help, hopefully they are not going to make our lives even more miserable by pumping more money into the system ... increasing salaries or public expenditures in order to get some additional favors from the public," he said.