Serb Central Bank Holds Rate Before Brexit Vote, New Government

  • Majority of economists in Bloomberg survey predicted a cut
  • Serbian benchmark rate remains at 4.25% since February

Serbia’s central bank left borrowing costs unchanged for a third month, refraining from easing ahead of the U.K.’s vote on whether to leave the European Union and the formation of a new government following April snap elections.

The National Bank of Serbia left its one-week repurchase rate unchanged at 4.25 percent, according to a statement published on its website on Tuesday. Twelve of 26 economists surveyed by Bloomberg predicted the decision, while 14 expected a cut to 4 percent.

“Despite weak inflation pressures and continued improvement in macroeconomic indicators, uncertainties in global commodity and financial markets persist and call for caution in monetary policy,” the bank said in the statement. “Inflation should gradually start to increase as of may and return to target range at the beginning of next year.”

The central bank has cut its main rate 16 times since 2013 from 11.75 percent to help spur inflation and counteract slowing demand caused by fiscal consolidation by Prime Minister Aleksandar Vucic’s government. The premier, who won a new four-year term in April 24 elections, is seeking to push through measures agreed with the International Monetary Fund and prepare the biggest former Yugoslav republic for the EU membership by 2020.

The yield on Serbian dollar bonds maturing in 2021 rose 1 basis point to 4.167 percent at 12:02 p.m. in Belgrade The dinar traded little changed at 122.6360 against the euro.

Brexit, Fed

Vucic, who is set to create a new government by early June, has vowed to streamline the public sector by cutting thousands of jobs and sell or close unprofitable companies that drain around $1 billion from state coffers each year. The cost-cutting has undercut demand, and the central bank has failed to bring inflation back to its 2.5 percent to 5.5 percent target range since Feb. 2014.

Still, Serbian rate setters have shown caution in the past at easing monetary conditions to prevent investors from ditching assets denominated in the dinar, which the central bank has spent more than 700 million euros ($792 million) this year so far to keep stable.

External factors including the U.K. referendum on a potential exit from the European Union and the U.S. Federal Reserve’s meeting next month were also probably key reasons behind the bank holding fire, UniCredit analysts Dan Bucsa and Dumitru Vicol said in a note the day before the rate decision.

“The central bank will probably refrain from cutting rates for as long as external financing remains problematic,” Bucsa and Vicol said. “The Brexit referendum and the Fed’s rate decision may increase pressure on Serbian asset prices from June onwards” because “Serbia has one of the shortest average maturities of local-currency debt among all EM, making yields and FX vulnerable to external shocks.”

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