Serbia Holds Rates as Policy Loose Enough to Lift Inflationby
Currency reserves down 5% this year due to dinar defense
Central bank says inflation may approach target by late 2016
Serbia’s central bank left borrowing costs unchanged after a surprise cut last month as it continues to defend the dinar against depreciation pressure before next month’s parliamentary elections.
The National Bank of Serbia kept its one-week repurchase rate at 4.25 percent on Thursday, according to a statement on its website. Seventeen of 25 economists surveyed by Bloomberg predicted the move. Seven saw a quarter-point reduction and one said the regulator in Belgrade will reduce the benchmark to 3.75 percent.
“The existing degree of expansive monetary policy is sufficient for inflation to start its gradual increase as of the middle of the year,” the central bank said in the statement. Price growth should “return to the target by the end of this year or at the start of next year, which is why the National Bank of Serbia maintains cautious monetary policy.”
Prime Minister Aleksandar Vucic, whose party leads polls before the April 24 election, is campaigning on pledges to implement budget-strengthening measures, but uncertainty over how long it will take to form a government is putting investors off Serbian assets. The central bank has been struggling to spur inflation for more than two years and has sold 510 million euros ($577.5 million) this year to keep the dinar stable, equivalent to almost 5 percent of its foreign reserves.
While the central bank may get some help from the expanding monetary stimulus in the euro area, it cited a deteriorating global growth outlook, geopolitical risks, commodity prices and divergent monetary policies of the biggest banks as the major risks ahead.
Central bank Governor Jorgovanka Tabakovic, a Vucic ally, has rejected advice from the International Monetary Fund to allow a more flexible dinar. She argues that such a step would leave the Balkan country more vulnerable to shocks.
The dinar gained 0.2 percent to trade at 123.07 against the euro as of 2:42 p.m in Belgrade. The yield on dollar-denominated government debt due 2021 was down 9 basis points to 4.741 percent.
Inflation is another concern for the central bank, which predicts price growth will remain below its target band of 2.5 percent to 5.5 percent until at least mid-year. After that, it will gradually approach the lower end of that range late this year or in early 2017, according to policy makers’ Feb. 19 inflation report.
Vucic’s fiscal goals include axing thousands of jobs in public administration, schools, hospitals, police and state-run companies, part of a three-year austerity program negotiated with the IMF. The premier, whose Serbian Progressive Party won elections in 2012 and 2014, wants to extend his term through 2020 to prepare the nation for European Union membership.
While the economy is running below potential and low inflation “would require easier monetary conditions, currency stability may be a more important concern in the short term,” UniCredit Bank economists Dan Bucsa and Dumitru Vicol said March 14 in an e-mailed note. The central bank could cut rates by a quarter-point “if reforms resume after the elections,” they said.