Serbia Holds Rates to Shield Dinar Before IMF Loan ApprovalGordana Filipovic
Serbia’s central bank kept borrowing costs unchanged for a third month to stem dinar volatility as the country awaits the approval of an International Monetary Fund loan program later in February.
The National Bank of Serbia kept its one-week repurchase rate at 8 percent after last cutting it by 50 basis points on Nov. 13, according to a statement on its website on Thursday. Nineteen of 23 economists surveyed by Bloomberg predicted no change, three saw a quarter-point reduction and one forecast a half-point cut.
Rate setters were guided by “pronounced geopolitical tensions,” the bank said in the statement. Also playing a role were “instability in international commodity and financial markets, which could result in increased investor risk aversion, slower capital flows and a more uncertain” economic recovery in the euro area following the the European Central Bank’s decision to buy assets to avert deflation, it said.
The Serbian regulator is refraining from policy easing even with inflation running below target, as pressure on the dinar forced it to sell 705 million euros ($800 million) since the last interest-rate cut. The bank changed reserve-requirement rules twice, releasing euro liquidity and draining dinars in efforts to stabilize the currency and encourage lending to bolster economic activity after three recessions in five years.
Rate setters expect inflation to gradually return to their target range of 2.5 percent to 5.5 percent this year, after 12 months spent below the lower end of the band. It remains below the target due to an “unexpectedly low increase in regulated prices” as well as cheap crude oil and farm produce.
The inflation rate fell to 1.7 percent from a year earlier in December, the lowest since 2007 when the central bank started monitoring the consumer-price index to gauge inflation.
The dinar traded 0.1 percent stronger at 121.829 against the euro as of 12:19 p.m. in Belgrade, according to data compiled by Bloomberg. It has lost 0.4 percent this year.
The central bank sold almost 1.9 billion euros in 2014 to stem the dinar’s decline. Market interventions contained the currency’s depreciation to 6 percent against the euro while depleting reserves to 9.9 billion euros at the end of last year.
Premier Aleksandar Vucic agreed with the IMF on a three-year, 1 billion-euro stand-by loan on Nov. 20, promising to sell Zelezara Smederevo doo steelworks by Feb. 1 and adopt restructuring plans for gas monopoly Srbijagas JP and three chemical plants.
The IMF wants Serbia to stop providing new subsidies and guarantees to unprofitable companies as part of the plan to consolidate public finances to qualify for the program.
The biggest former Yugoslav republic may need an extra year and additional 300 million euros in savings to halt a further increase in public debt, according to the country’s Fiscal Council, which supervises compliance with budget targets.