Getting the Jump on World’s Big Economies, Serbia Cuts Rates

(Bloomberg) -- Serbia’s central bank unexpectedly cut borrowing costs, taking advantage of a stronger currency and slowing inflation to steal the march on the world’s major economies before they kick off monetary easing.

With the U.S. Federal Reserve signaling looser policy, Serbia reduced its benchmark by a quarter point to 2.75% on Thursday for the first move lower in 15 months. A weaker outlook for the euro-area economy may bring more European Central Bank stimulus and further boost capital flows into higher-yielding markets.

The decision is the first of its kind in Europe since Ukraine lowered its key rate in April and follows a long tradition by the National Bank of Serbia of surprising economists on decision day. Only one of the 24 economists in a Bloomberg survey predicted the move, although more than half said they expected the bank to lower borrowing costs by September.

“A slower normalization or a new cycle of monetary-policy relaxation by the major central banks should positively affect the global financial markets and capital flows to emerging markets,” the central bank said in a statement. “Inflation will continue to move within the target band, most probably around the lower bound until the end of this year and during next year.”

The central bank has been trying to slow dinar appreciation, buying a record amount of euros in the past month. The interventions have prevented the stronger currency from tightening conditions for businesses too much, while also helping support economic policies of President Aleksandar Vucic.

Getting the Jump on World’s Big Economies, Serbia Cuts Rates

The dinar was less than 0.1% weaker against the euro after the decision. 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 as the country relies on foreign bond investors to finance the budget and repay debts.

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 ($1.12 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.

Erste Group Bank AG said in a note that it had revised an earlier call and now sees another quarter-point cut this year.

“The stance of the monetary policy should remain accommodative and growth-supportive, with further interventions on the FX market to tame dinar strength, coupled with occasional swap auctions to boost dinar liquidity,” Erste analyst Mate Jelic said.

©2019 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.