Serbia Holds Key Rate as October Power Bills May Boost Inflation

  • 21 of 24 surveyed economists predicted no rate change
  • Higher electricity prices expected to push CPI higher

Serbia’s central bank left borrowing costs unchanged for a second month before a planned October rise in electricity bills that is seen pushing price growth higher later this year.

The National Bank of Serbia kept its one-week repurchase rate at 4 percent on Thursday, according to a statement on its website. All but three of the 24 economists surveyed by Bloomberg predicted the move, with the rest forecasting a cut to 3.75 percent. With the $37 billion economy buffeted by global policy shifts, rate setters in Belgrade have repeatedly said international markets will guide policy decisions.

“An expected gradual increase in inflation, despite the fact that CPI will remain below target, for now, is the main reason to keep the rate on hold, especially considering that electricity prices will be raised on Oct. 1,” Ljiljana Grubic, an analyst at Raiffeisenbank in Belgrade, said by phone before the rate decision.

Policy makers in the Balkan state are trying to kindle price growth even as Prime Minister Aleksandar Vucic’s government squeezes the budget deficit under a monitoring deal with the International Monetary Fund. The decision to hold rates coincided with a meeting at the European Central Bank, whose quantitative easing program -- along with very loose monetary policy in the U.S. -- has boosted investment flows into Serbia, subsequently propping up the dinar and easing inflationary pressure.

Low Inflation

“The rate setters had in mind the expected impact of interest-rate cuts to date and an expected movement in inflation in the coming period,’’ the central bank said in the statement. A gradual increase in aggregate demand and low oil prices are expected to bring inflation back to target in the first half of next year, it said.

Serbian inflation accelerated to a five-month high of 1.2 percent in August. Price growth has hunkered below the bank’s 2.5 percent to 5.5 percent target since 2014, and rate setters see it climbing out of the basement in the first half of 2017.

The dinar, which has remained steady since Aug. 11, was little changed at 123.3063 against the euro at 12:05 p.m. in Belgrade. The yield on Serbia’s dollar bonds maturing in 2021 fell five basis points to a record low 3.555 percent.

The government has embarked on cost-cutting and other measures that may reduce Serbia’s 2016 budget deficit to half of its plan, the independent Fiscal Council said Monday. The shortfall may shrink to as small as 2 percent of gross domestic product, compared with an initial goal of 4 percent and a gap of 3.7 percent in 2015.

IMF Praise

The IMF praised Vucic’s efforts to narrow the budget shortfall last week and encouraged him to accelerate the overhaul of state-owned companies that drain money from the government’s coffers. At the same time, the Washington-based lender called on the central bank to show “greater tolerance of short-term fluctuations in the dinar,” advice that goes against the monetary authority’s practice of intervening in the market to prevent swings.

The “cautiously accommodative monetary policy stance is warranted in the current environment, while the policy framework can be strengthened further,” the IMF said in a report last Friday.

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