Serbia Keeps Key Rate as Fed Outlook Outweighs Slowing Inflation

  • Majority of economists in survey predicted no rate change
  • Key rate on hold even after September inflation slowdown

The Serbian central bank left borrowing costs unchanged for a third month, disregarding an unexpected inflation slowdown and watching out for the dinar’s reaction to the increasing prospects of an interest-rate increase in the U.S.

The National Bank of Serbia left the benchmark one-week repurchase rate at 4 percent on Thursday, according to a statement on its website. Twenty-one of 24 economists surveyed by Bloomberg predicted the move, with the rest forecasting a cut to 3.75 percent.

“Inflation is expected to return within target band around middle of next year,” the bank said in the statement, citing policy makers’ deliberations. “The need for cautious monetary policy is justified by uncertainty in international financial markets regarding future measures by the Fed and the European Central Bank and their possible impact on global capital flows.”

The decision follows the publishing of minutes from the Federal Reserve’s latest meeting that showed several officials said a rate hike was needed “relatively soon.” Serbia’s policy path is linked to the Fed’s outlook as the Balkan country relies on U.S. investors for its bond financing and portfolio outflows could create depreciation pressure on the dinar and drive price growth higher.

“With inflation expected to return to target by June next year rather than January, the central bank has room for another cut, but we think they should stay cautious before an expected Fed rate increase,” Ljiljana Grubic, an analyst at Raiffeisen Banka AD in Belgrade, said before the rate decision.

The dinar, which has gained 0.15 percent since the previous rate meeting Sept. 8, traded little changed at 123.16 against the euro at 12:04 p.m. in Belgrade. The yield on Serbia’s dollar bonds maturing in 2021 rose one basis point to 3.885 percent.

Serbian Inflation slowed to 0.6 percent in September from 1.2 percent in the previous month. The rate has stayed below the central bank’s target range of 2.5 percent to 5.5 percent for 31 months, even after 17 rate cuts from 11.75 percent since May 2013. The monetary authority has repeatedly said that international markets will guide its policy decisions.

While rate setters expect household spending to improve and gradually lift prices, domestic demand remains weak. Premier Aleksandar Vucic is keeping a lid on public wages and pensions after cutting them in late 2014 in order to narrow the budget deficit and meet key demands set in a three-year accord with the International Monetary Fund.

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