• Bank holds 1-wk repurchase rate ahead of Fed decision
  • Weaker dinar prompts external vulnerability concerns

Serbia’s central bank left borrowing costs unchanged for the second straight month amid dinar sell-off, holding fire a week before the U.S. Federal Reserve decides whether to raise rates first time in almost a decade.

The National Bank of Serbia kept its one-week repurchase rate at 4.5 percent on Thursday, according to a statement on its website, after it reduced it by a combined 1.5 percentage points from August to October. Eighteen of 23 economists surveyed by Bloomberg forecast no change, two predicted a quarter-point cut and three saw a reduction to 4 percent.

The rate setters noted “existing uncertainties mostly referring to the international environment, primarily the uncertain reaction of market participants to an expected increase of interest rate by the Fed and its impact on commodities and financial markets,” the bank said in the statement.

The central bank has confounded economists’ expectations in seven of its 12 rate decisions this year as it tries to spur growth after three recessions since 2009. It cut interest rates by a cumulative 350 basis points through October to stoke inflation that has remained below its target range since February 2014. At the same time, policy makers have has tried to avoid the risk of triggering a selloff of Serbian assets by reducing borrowing costs too quickly.

The dinar strengthened 0.2 percent to 122.14 against the euro at 12:05 p.m. in Belgrade, according to data compiled by Bloomberg. The yield on Serbia’s dollar bonds maturing in 2021 rose 1 basis point to 4.496 percent.

“It would have been careless of the central bank to move on rates ahead of the Fed’s Dec. 16 rate decision,” Ljiljana Grubic, an analyst at Raiffeisenbank in Belgrade, said before the meeting. Investors’ reactions are difficult to predict because the “Fed has not changed its rate for nine years, and the question is how much of a buffer the ECB is offering to neutralize higher U.S. rates.”

While Prime Minister Aleksandar Vucic clinched a precautionary loan deal with the International Monetary Fund in February, the dinar’s drop has raised concern about Serbia’s exposure to external shocks, according to Deanie Jensen, an emerging-market economist at ING Groep NV in London.

“Fiscal consolidation and benign inflation are not enough to prompt the NBS to cut as external financing risks take center stage,” she said before the announcement. “With 40 percent of public debt denominated in euros, 30 percent in dollars and a high participation of foreign investors in the portfolio of government securities, the economy is vulnerable to any external turmoil.”

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