Serbia Holds Benchmark Rate as Dinar Defense Drains Reserves

Serbia’s central bank kept borrowing costs unchanged for a second month despite inflation stuck below its target as efforts to prop up the dinar drain foreign-currency reserves.

The National Bank of Serbia kept the one-week repurchase rate at 8 percent after last cutting it by 50 basis points on Nov. 13, according to a website statement today. Nineteen of 23 economists surveyed by Bloomberg predicted no change and four saw a quarter-point reduction.

“Notwithstanding the low inflation” the benchmark rate is “grounded by elevated fiscal and geopolitical risks,” Ljiljana Grubic, an analyst at Raiffeisen Banka AD in Belgrade, said by e-mail. “Lowering the key rate would not enhance economic growth.”

Policy makers are juggling efforts to bring price growth to their goal and stop the dinar’s decline amid the country’s third recession in five years. Inflation has stayed below the target range of 2.5 percent to 5.5 percent since last February as the government refrained from raising regulated prices and deflationary pressure from the euro area intensified.

Dinar Defense

The dinar traded 0.2 percent weaker at 122.7505 against the euro as of 2:06 p.m. in Belgrade, according to data compiled by Bloomberg.

The central bank’s defense of its currency, which has depreciated against the euro for nine straight months, has curbed international reserves to the lowest level since September 2012.

The monetary authority sold almost 1.9 billion euros ($2.2 billion) last year to stem the dinar’s drop, depleting reserves to 9.9 billion euros at the end of December. The dinar lost 6 percent against the euro last year. The regulator sold euros twice this month as increased energy imports kept the dinar under pressure.

The central bank sees an “ongoing presence of global risks, which have increased investor sensitivity to investments in emerging markets,” it said in a statement. “Inflation will return toward the tolerance band by mid-year.”

Reserve Requirements

The inflation rate fell to 1.7 percent from a year earlier in December, the lowest since 2007 when the central bank introduced the consumer-price index to gauge inflation. Price growth peaked at 12.9 percent in October 2012.

The central bank also changed mandatory reserve ratios today for the third time in two months, saying the measure should be “an incentive for banks to boost their lending activity, lower the costs of borrowing and rely more on long-term and dinar sources of funding.”

Changing the reserve requirements “will have only a one-off impact on the dinar and no impact on credit activity,” Raiffeisen’s Grubic said. “Credit activity won’t be unlocked until they start resolving problems with non-performing loans.”

As part of its plan to stabilize the economy, the government agreed with the International Monetary Fund on a three-year precautionary loan in November. The lender will discuss the program on Feb. 23, Premier Aleksandar Vucic said last month.

The IMF’s main condition was that Serbia stop providing subsidies or guarantees to unprofitable state companies. The government also needs to narrow the budget deficit to about 3 percent of economic output by 2017, from about 8 percent of GDP in 2014.

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