Serbia’s central bank will probably pause its tightening of monetary policy and leave borrowing costs unchanged as the dinar surges. The Belgrade-based Narodna Banka Srbije will keep the benchmark one-week repurchase rate at 11.5 percent after raising it from 11.25 percent on Jan. 17, according to 12 of 22 economists in a Bloomberg survey. Nine expect a rate increase of between a quarter-point and a full percentage point, while one sees a quarter-point cut. The central bank will announce its decision at noon today in Belgrade.
“We see the central bank leaving the repo rate at 11.5 percent” as the dinar “remains strong amid the ongoing risk appetite favoring high-yielding currencies,” analysts at Zagreb-based Hypo Alpe-Adria-Bank DD, including Hrvoje Stojic, said in a Feb. 4 note to clients.
The dinar has advanced because of tight monetary policy, with the central bank raising its benchmark interest rate seven times since June by a total of 200 basis points, or 2 percentage points, to 11.5 percent, to bring inflation back to the target of 4 percent, plus or minus 1.5 percentage points by the end of 2013. The inflation rate stood at 12.2 percent in December.
The dinar gained 1.2 percent against the euro last month, the second-largest advance behind the Romanian leu among more than 170 currencies tracked by Bloomberg. It trade at 111.4711 late yesterday, down 0.6 percent from the previous close.
Bucking Trend
Serbian rate decisions have run counter to others in eastern Europe, where borrowing costs are falling to halt economic slowdowns amid Europe’s debt crisis. The National Bank of Serbia wants to ease inflation pressures stemming from regulated price increases and expanded dinar liquidity.
Inflation has been accelerating since April 2012, when it fell to a 30-year low of 2.7 percent, due to rising food costs amid a drop in farm output. Prices continued to rise even as the economy fell into its second recession in three years and consumer demand contracted as wages remained tame and unemployment expanded.
Inflation is “not yet on a decelerating trend,” Eldar Vakhitov, an emerging-markets analyst at Barclays Plc’s investment-banking unit in London, said yesterday in an e-mailed note. Consumer prices are likely to rise “a bit in the coming months before moderating” in the second quarter “so at least one more hike is warranted” as the “policy rate is not yet too high given current inflation levels.”
Repo Operations
The central bank re-introduced reverse repo operations last month, citing increased liquidity at banks and a need to mop up the excess to avoid an impact on demand, inflation and the dinar’s exchange rate.
Prime Minister Ivica Dacic’s six-month-old coalition government is seeking to curb price increases and restart growth after the economy contracted an estimated 1.7 percent in 2012, betting on higher exports of Fiat SpA cars produced in Serbia and more sales of crude oil products abroad for growth.
Policy makers appear keen on “preventing any major spillover of higher regulated price increases to overall inflation,” Ljiljana Grubic, an analyst with Raiffeisenbank AD in Belgrade, said. More expensive utility services, including electricity and gas, are needed to help unprofitable public companies narrow some of their losses, she added.
Source Bloomberg