Serb Interventions Point to Close Rate Call: Decision Day Guide

(Bloomberg) -- Serbia is set to leave interest rates untouched for one last time before a strong dinar and easing inflation provide room for cuts later this year.

With the U.S. Federal Reserve expected to imminently loosen monetary policy, the Serbian central bank has held tight despite the currency’s appreciation to levels not seen consistently since 2014. As part of its support for the economic policies of Aleksandar Vucic’s government, it bought a record amount of euros last month to slow the dinar’s advance.

One potential way to relieve the appreciation pressure would be to cool investor demand for the dinar by reducing rates. But, according to all but one of the 24 analysts in a Bloomberg survey, that won’t happen yet. They see the bank leaving the benchmark at 3% on Thursday. Six said they expect a rate cut in August and eight see one in September.

As other central banks in eastern Europe including the Czechs and Romanians grapple with quickening inflation, the decision in Serbia “might be a close call,” the according to the analysts at Erste Group Bank AG.

“Appreciation pressure on the Serbian dinar, which has been mitigated by central bank interventions in recent weeks, could be a reason why the central bank might opt for a rate cut,” they said in a note, adding that they predict no change.

‘Vucic’s Legacy’

Central bank Governor Jorgovanka Tabakovic, a senior member of Vucic’s ruling party, has taken a careful stance on rates to avoid triggering a dinar sell-off. She has repeatedly praised what she calls “Vucic’s legacy” of “full coordination of monetary and fiscal policies,” saying it has helped keep the dinar “relatively stable” and inflation low.

As part of that effort, the bank bought 1 billion euros ($1.1 billion) in the foreign-exchange market between last month’s rate decision and July 9.

That helped keep the dinar from gaining more than 0.5% against the euro this year. But it still allowed appreciation, which may help the government meet a key pledge by Vucic ahead of elections next year to lift the average wage to 500 euros a month by end-2019.

Slowing inflation and economic growth have also boosted arguments for a rate cut. Consumer-price growth was 2.2% in May, below the mid-point of central bank’s 1.5%-4.5% tolerance band. Output grew 2.5% in the three months through March, the weakest quarterly expansion since 2017.

“Our central scenario is now for two quarter-point rate cuts during summer months,” said Credit Agricole Serbia’s head of Treasury and FX, Vladimir Djordjevic.

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, Andrew Langley

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