Serb Central Bank Seen Holding Benchmark Rate Amid Fiscal Easing

(Bloomberg) -- Serbia’s central bank is expected to leave its benchmark interest rate unchanged at a policy meeting on Thursday, reflecting caution as the government raises public wages and pensions and spends more on investment to bolster growth.

The National Bank of Serbia is seen holding its 1-week repurchase rate at 3.5 percent for the third straight month, according to 21 of 25 economists surveyed by Bloomberg News. Four predict a cut to 3.25 percent. The bank surprised with two consecutive cuts in September and October, taking advantage of months of dinar gains that had effectively tightened monetary conditions and provided room for lower borrowing costs.

Dinar appreciation and subdued underlying inflation may prompt Serbian rate setters into further policy easing, the International Monetary Fund said in a staff report on Serbia last month. The currency has strengthened 0.8 percent against the euro since the last rate meeting on Dec. 7 for a 12-month gain of 4.2 percent. Still, the government’s plan to raise salaries for state employees and other spending measures may limit room for lower rates.

"The unusually strong dinar is not a done deal, plus domestic demand should go up with rising income and announced hikes in pensions and public sector wages,” Jakub Kratky, an analyst at Generali Investments CEE in Prague, said in an email. “I would be cautious ‎about reinitiating the policy easing.”

Serbia remains reliant on international investors for funding and the central bank should carefully watch moves in key rates in the U.S. and the euro area, UniCredit researchers said in report Tuesday.

While “poor growth and a potential dip in inflation if regulated prices are not raised leave room for additional cuts to 3 percent, there are two factors that may prevent further easing: a dip in risk appetite that may affect the financing of the current-account deficit and the needed depreciation of the dinar,” the researchers said.

--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, Kevin Costelloe

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