Serb Central Bank Holds Rates as Cost of Defending Dinar Weighs

  • 18 of 26 economists predicted no change in 1-wk rate
  • Central bank holds rate as IMF arrives to inspect finances

Serbia’s central bank left borrowing costs unchanged for a fourth consecutive month, refraining from easing after selling almost a 10th of its foreign currency reserves this year from its foreign reserves.

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 Thursday. Eighteen of 26 economists surveyed by Bloomberg predicted the decision, while 8 expected a cut to 4 percent.

“Under current circumstances, the existing level of monetary policy expansiveness ensures that inflation will return and stabilize within target bands at the start of next year,” the bank said in the statement. Rate setters were “guided by uncertainties in global commodity and financial markets as well the expected weakening of disinflationary pressures,” it said.

The central bank refrained from a rate cut as an International Monetary Fund mission arrived in the capital, Belgrade, for a two-week visit to inspect the results of fiscal consolidation measures. It will discuss ways for the government to accelerate steps aimed at halting a further increase in public debt.

The monetary authority last lowered its main rate in February, wrapping up a series of 16 cuts since 2013 from 11.75 percent to help spur inflation and growth. It has held fire while Premier Aleksandar Vucic, whose Progressive Party won a majority in April 24 snap elections, prepares to create a new government. He’s pledged to pursue IMF-endorsed measures designed to narrow the fiscal gap and sell off money-losing state-owned companies that drain more than $1 billion a year from state coffers.

The yield on Serbia’s dollar bonds maturing in 2021 fell 1 basis point to a record-low 4.065 percent at 12:18 p.m. in Belgrade. The dinar was little changed at 123.475 per against the euro.

The IMF will in part focus on a need to ease restrictions on dinar volatility and bolster confidence in the currency amid low inflation, a shift from a focus of quashing painful past memories of hyper-inflation and currency depreciation. The central bank has repeatedly said it won’t weaken the dinar to bolster inflation and has spent 800 million euros ($910 million) of its reserves in the market to smooth volatility in the currency.

Inflation has remained below the central bank’s target range of 2.5 percent and 5.5 percent since Feb. 2014, mainly due to low crude oil prices and weak demand at home after Vucic cut public wages and pensions and increased taxes to improve the fiscal balance. Inflation is expected to have bottomed out in April and will return to the target band by early next year, governor Jorgovanka Tabakovic said on May 24.

“With the dinar under pressure recently and FX reserves falling to their lowest level in three and a half years, the central bank is likely to remain cautious, despite inflation running well below the 4 percent target,” Dan Bucsa, an analyst at UniCredit in London, said in June 6 e-mail.

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