Serbia's Central Bank Leaves Rates Unchanged at 8 Percent on Inflation

Serbia’s central bank left its key policy rate unchanged as concern over the dinar’s volatility outweighs economic indications that a cut is warranted.

National Bank of Serbia policy makers kept the rate at 8 percent for a fourth meeting after cutting the benchmark rate on May 11 to the lowest since it launched inflation targeting in August 2006.

Serbia’s central bank sees weak aggregate demand and tame inflation as sufficient to keep its policy easing bias, but cannot continue with rate cuts because of the weak dinar.

The country’s dinar has sunk 8.4 percent against the euro this year so far, making debt repayment more expensive, while another rate cut after three reductions since Jan. 8 would push the dinar even lower.

Policy makers are struggling between controlling the currency and boosting economic activity, analysts said before the rate announcement.

“Rates are staying unchanged in the base scenario, though the central bank seems to still have a bias for lower rates, while the risk of continued depreciation could trigger hikes,” Agata Urbanska, an economist for central Europe and the Balkans at ING Bank in London, said before the report. She sees no change in borrowing costs for the rest of the year.

Holding rates for another two weeks, when the board would next meet, also gives the government time to work out how to woo investors to its debt, after a series of Treasury bill sales over the past month ended undersubscribed, signaling possible budget-financing trouble.

“The central bank is now facing a choice between the two evils, between raising its interest rate and draining the reserves,” said Djordje Djukic, a former central bank board member, adding the central bank may be forced into frequent and sharp interest-rate increases.

The central bank has spent more than 1.3 billion euros ($1.62 billion) so far this year to slow the dinar declines.

The next meeting on rates will be held on July 20, the bank said.

To contact the reporter on this story: Gordana Filipovic in Belgrade at

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