(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.
Serbia kept its key policy rate unchanged as it seeks to ride out a surge in consumer prices without joining the wave of monetary tightening seen across central and eastern Europe.
The central bank left the benchmark rate at a record low of 1% for a 12th month, in line with expectations. With a firm grip on the dinar and subdued core price pressures, policy makers are opting to stay put even as the headline inflation figure is more than double the 3% target and may not return to the goal before the second half of next year.
The first in Europe to cut borrowing costs when the pandemic hit the continent in 2020, Serbia’s rate setters want to avoid swings in the benchmark and prefer other tools to tighten economic conditions. The central bank ended repo securities auctions in October, previously used to supply liquidity to banks, and is also paying more to banks to drain extra cash from the market.
“In the coming period, the National Bank of Serbia will gradually, in accordance with circumstances, continue to tighten monetary conditions through increases in average weighted repo rate, within the existing corridor of interest rates,” the bank said, referring to the tenders held every Wednesday. It added it chose to hold the benchmark as it has “the flexibility of the existing monetary framework.”
The statement is in line with Governor Jorgovanka Tabakovic’s earlier comments that the bank can wait with raising the benchmark at least while it stays above rates at the weekly reverse repo auctions. The average interest rate at the Dec. 8 tender was 0.34%.
Poland, the Czech Republic, Romania and Hungary are battling above-target inflation by cooling economies with higher borrowing costs. Meanwhile, Serbia capped prices of some staple foods and negotiated gas supplies from Russia at below-market terms through June to defuse some of the price pressures. In addition, the central bank keeps the dinar in a narrow range, helping to anchor inflation expectations.
The economy is seen expanding at least 7.5% this year, backed by the government’s generous pandemic relief programs that include cash handouts, wage and credit subsidies, which also fuel domestic demand and household consumption.
The central bank also said it’s “ready to react promptly, with all instruments at its disposal” if high inflation persists longer than expected. The current projection sees the headline figure declining as of the second quarter and returning to the tolerance band in the second half of 2022, it said.
(Updates with central bank comment in new fourth paragraph.)
More stories like this are available on bloomberg.com
©2021 Bloomberg L.P.
