• Bank pauses after surprising economists with three cuts
  • Rising global interest rates pose risk for Serbia, IMF says

Serbia kept borrowing costs unchanged, holding fire after surprising economists with three consecutive cuts as policy makers brace for the impact of higher U.S. interest rates.

The National Bank of Serbia kept its one-week repurchase rate at 4.5 percent on Thursday after reducing it by a combined 1.5 percentage points between August and October, according to a statement on its website. Fifteen of 23 economists surveyed by Bloomberg forecast no change, four predicted a quarter-point cut and four saw a half-point reduction.

A U.S. Fed “interest rate increase could adversely affect liquidity in international financial markets and capital flows to emerging markets,” the bank said in the statement. Inflation will “temporarily return to target range” at the start of 2016 and should stabilize by mid-year, it said.

The bank cut its key policy rate two days after an International Monetary Fund mission agreed to make an additional 89.6 million euros ($96 million) in financing available to Prime Minister Aleksandar Vucic’s government. The central bank is trying to spur growth after three recessions since 2009, cutting interest rates by a cumulative 350 basis points before Thursday’s decision to lift inflation that has languished below its target range since February 2014.

The dinar weakened 0.2 percent to 120.63 against the euro at 12:03 p.m. in Belgrade, according to data compiled by Bloomberg. The yield on Serbia’s dollar bonds maturing in 2021 slid four basis points to 4.565 percent.

External Risks

While the “recent monetary easing is appropriate and should support private sector growth,” Serbia also “faces continued external risks, notably from rising global interest rates, the slowdown in emerging markets, and the potential intensification of the refugee crisis,” the IMF said in a statement as its mission.

Inflation has run below the bank’s target range of 2.5 percent to 5.5 percent since February 2014, as cheap global crude oil prices and weak domestic demand -- the result of public wage and pension cuts -- tame price growth.

Keeping borrowing costs on hold would help avoid capital outflow, as “risks related to an interest-rate increase by the Fed are growing, and once they raise rates, there will be some impact on debt markets,” Ljiljana Grubic, an analyst at Raiffeisenbank in Belgrade, said by phone before the rate decision. It should also take into account ECB monetary stimulus and look at eastern Europe, where policy easing seems to have come to a halt in some countries, she said.

The central bank has repeatedly said that lowering rates and mandatory reserves, should translate into cheaper commercial loan costs and increased credit activity, which it sees as key to reviving growth. Banks have remained reluctant to increase lending until the government comes up with solutions to resolve non-performing credit portfolios, which account for nearly a quarter of their loan portfolios.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE