Serb Central Bank Poised for Tight Rate Call: Decision Day Guide

(Bloomberg) -- Europe’s most unpredictable central bank is leaving investors on tenterhooks again as they wonder if Serbia’s interest-rate decision augurs the third surprise cut in as many months.

The prospect of two down and one to go would leave policy makers repeating a feat of confounding economists’ predictions last achieved in 2015, with three straight rate reductions. Last year they stopped after cutting twice.

Following the quarter-point cuts that brought the benchmark rate to a record-low 2.5%, only five of 24 economists surveyed by Bloomberg see another happening Thursday. But the window of opportunity for a possible final cut is narrowing as the government raises public wages and pensions ahead of 2020 elections.

“They should act quickly as this is the time when a business cycle gathers pace,” said Ljiljana Grubic, an analyst at Raiffeisenbank in Belgrade who is expecting a quarter-point cut.

Serbia’s Growth Lagging Government Goal Signals More Rate Cuts

That argument is bolstered by a strong dinar and inflation at the lower end of the central bank’s 1.5% to 4% target band. And with the European Central Bank expected to announce more easing and other monetary authorities loosening around the world, Serb policy makers have little reason to worry about triggering investor flight.

“Markets are expecting a rate cut plus quantitative easing from the ECB the same day and other global EM central banks are also cutting rates quite aggressively,” said Jakub Kratky, an analyst at Generali Investments in Prague.

Still, UniCredit economist Mauro Giorgio Marrano sided with the majority of analysts. Capital outflows across emerging markets may stay policy makers’ hand as they assess the impact of the July and August decisions. It would also avoid eroding a premium on Serbian assets, which are often vulnerable to changes in investor sentiment.

“A global downturn could slow FDI inflows,” he said. “Under such circumstances, investors are likely to demand positive real returns.”

--With assistance from Harumi Ichikura.

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Michael Winfrey, Andras Gergely

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