World's Hardest-to-Predict Central Bank Ponders More Easing

  • Analysts' estimates miss seven of 10 rate decisions this year
  • Bank says difference is in pace, not direction of its moves

Even as global market turbulence is making it increasingly difficult to predict central banks, Serbia’s is in a league of its own.

Of the Belgrade-based monetary authority’s 10 rate decisions this year, economist estimates missed seven times, the most in the world among benchmarks tracked by Bloomberg. Now the central bank is again indicating a readiness to cut borrowing costs to a record low, while some forecasters say doing so may raise the risk of a sell-off in Serbian assets.

Policy makers at major global central banks are taking pains to telegraph their moves transparently to avoid roiling markets as they wade deeper into uncharted monetary-policy territory. In Serbia, rate setters have argued that continued easing will support a lending recovery following three recessions since 2009, inflation is still well-below target and policy makers’ response to a slowing global economy reduces the risk of liquidity flight. Investors either aren’t listening or they’re trying to send the message that cutting too deeply too fast may be a mistake.

“There is a discrepancy between what the market sees and what the central bank does,” Ljiljana Grubic, an analyst at Raiffeisenbank AD in Belgrade, said by phone. “But the market seems to be sending a signal that a further cut may be too risky and that they are not seeing room for such optimism.”

Following the bank’s most recent surprise, when it cut the benchmark half a percentage point to 4.5 percent last week, Societe Generale SA emerging-markets strategist Roxana Hulea recommended selling Serbia’s three-year dinar bond because the move “led to a further compression in yields.” Societe Generale continues to have a “bullish view on Serbian assets” reinforced by a “positive assessment of local policy makers’ commitment for further economic adjustment,” Hulea said. The bank recommends being long on Serbian government bonds, toward the longer end of the yield curve. The yield on Serbia’s dollar bond due in September 2021 was little changed at 4.53 percent at 12:31 p.m. on Tuesday in Belgrade.

Wrong-Footing Market

In an era beset by bouts of market turmoil, it’s not the first time a central bank has repeatedly wrong-footed investors. After taking the helm of the Bank of Israel in 2013, Governor Karnit Flug issued six rate decisions that ran counter to most economists’ forecasts. Sweden’s Riksbank has also repeatedly moved contrary to the consensus estimate since 2013.

Serbia has taken the lead for 2015. Since February, policy makers have left the rate on hold only once -- in July -- which was also the only time the decision was in line with the consensus estimate, according to Bloomberg surveys. The bank cut its one-week repurchase rate by half a percentage point in each of the other seven months, with forecasters expecting no change five times and a quarter-point cut twice.

Serbia's central bank cut rates six of the last seven months, confounding analysts' expectations.
Serbia's central bank cut rates six of the last seven months, confounding analysts' expectations.

The central bank said last week that there wasn’t a big discrepancy. It argued that investors were correctly predicting the direction of monetary policy and differed only on the pace of loosening. In the Bloomberg survey preceding the Oct. 14 policy meeting, two of the 23 analysts polled predicted the change, while seven foresaw a quarter-point cut and the rest no change.

Serbia’s economy grew 1 percent in the second quarter from a year earlier after a 2 percent drop from January to March. Prime Minister Aleksandar Vucic is pushing to reverse cuts to pensions and public salaries and his cabinet has yet to fulfill a pledge to the IMF to sell, restructure, or close down hundreds of unprofitable state companies.

Inflation Outlook

Policy makers have cited low oil prices and government austerity as the factors that have put the brakes on price growth, which slowed to 1.4 percent from a year earlier in September. They don’t see inflation returning to the 4 percent target until mid-2016, the bank said in its Oct. 14 decision.

“If the market does not see further room for additional rate cuts then it means they are seeing the policy of the central bank as targeting the exchange rate rather than inflation,” former central bank Governor Dejan Soskic said by phone.

While it has cut 350 basis points off the benchmark since March, the central bank has also tried to manage fluctuations in the dinar. It’s bought 910 million euros ($1 billion) and sold 130 million this year, according to its website, giving it foreign-currency ammunition if investors suddenly abandon dinar-assets, according to Milan Deskar-Skrbic, an analyst at Erste & Steiermarkische Bank DD in Zagreb, Croatia. 

“We all knew that they will take accommodative stance but we didn’t expect so many cuts one after other,” he said. “We don’t expect that there will be a sell-off at the moment, but if yields continue to go down so hard, and if some new jitters occur on international markets there could be.”

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