Serb Central Bank Holds Benchmark Rate After Surprise July Cut

  • Pause keeps cost of borrowing in “the zone of normalcy”
  • Expanding domestic demand seen boosting price pressures

Serbia’s central bank left borrowing costs unchanged, remaining in what Governor Jorgovanka Tabakovic called “the zone of normalcy” as a new government prepares to take office with a pledge to overhaul the economy.

Following a surprise quarter-point cut last month, the National Bank of Serbia kept its one-week repurchase rate at 4 percent on Thursday, according to a statement on its website. Twenty-two of 24 economists surveyed by Bloomberg predicted the move, while two expected a reduction to 3.75 percent. Tabakovic said last month she saw “hardly more room” for monetary easing in a cycle that has sliced the rate from 11.75 percent in 2013.

The rate setters “had in mind the impact of monetary policy easing so far, as well as the expected movement in inflation in the coming period,” the bank said in the statement. “The low base effect for crude-oil products, the gradual increase in aggregate demand and a gradual increase in global inflation” will lead price growth toward the bank’s inflation goal, it said.

The rate decision comes as Premier Aleksandar Vucic’s new cabinet faces a parliamentary confidence vote in Belgrade. He wants to cut the size of the public sector and enact other reforms endorsed by the International Monetary fund as he tries to make the country ready for European Union entry by 2020. He has vowed to trim the 2016 budget deficit by 0.7 percent of economic output and win an upgrade to move the country’s credit rating from junk to investment over the next three years.

The dinar, which had gained 0.2 percent since the bank’s July 7 rate cut, weakened 0.05 percent to trade at 123.3249 per euro at 12:03 p.m. The yield on Serbia’s dollar bonds maturing in 2021 remained unchanged at 3.802 percent, according to data compiled by Bloomberg.

Inflation Projection

The rate-setting board said last month that the cut to 4 percent would lead inflation back to the 2.5 percent to 5.5 percent target by the end of 2016 or in early 2017. Price growth has stayed below the band since February 2014.

“Robust retail-sales expansion, accompanied by rising growth of credit, particularly in dinars, could result in higher domestic inflationary pressures in the future,” Jakub Kratky, a financial analyst at Generali Investments CEE in Prague, said before the announcement. “I wouldn’t exclude a cut, let’s say, in October or later, but I wouldn’t call it the main scenario.”

The pause in monetary easing coincides with Vucic’s new push to cut jobs from government institutions, change the tax code and sell or close hundreds of state-owned companies that drain about $1 billion a year from public finances.

After winning April snap elections, Vucic said his coalition cabinet will take advantage of better-than-expected budget performance to cut the public deficit to about 2.5 percent of gross domestic product this year. That amount is narrower than the government’s earlier estimate of 4 percent, which it has targeted under its precautionary 1.2 billion euro ($1.3 billion) IMF agreement.

Before it's here, it's on the Bloomberg Terminal.