Serbia’s central bank holds rates, hike seen by year-end

BELGRADE – Serbia’s central bank left its key policy rate unchanged at 9.5 percent yesterday although it said it would keep a close eye on rising prices and the dinar currency, which has stabilized after a recent fall. Core inflation, which excludes goods whose price is set by the state, is expected to be 5 percent at end-2007, well within the 4-8 percent band the central bank is targeting, but Serbia, like other countries, has been hit by rising commodities prices. So far, the bank judged it is best to wait and see whether food price inflation has a permanent effect before reacting with higher rates, although it has a second policy meeting at the end of this month when analysts see a rise in rates. «Considering measures the government plans to take to calm down some food prices, the Monetary Board believes one should see the impact of these measures on inflationary expectations,» the bank said in a statement that referred to government plans for emergency imports of cooking oil and milk. The bank said it would monitor price pressures including the 2008 budget due to growing wage demands by unions and said the degree of policy tightening, in order to meet its inflation goal of 3-6 percent in 2008, would depend on inflationary expectations. While core inflation is currently within the target range, headline inflation will be between 9.0 and 9.5 percent this year, well above the government’s original plan of 6.5 percent plan. The bank said it believed the dinar has stabilized after a sharp fall in November which it said «had not been generated by economic fundamentals but psychological reasons.» Traders said that the rate decision and the statement left the market with little clue as to the outlook for the dinar. The currency was still seeking direction in interbank forex market and trading in a wide range between 79.29/79.39 and 79.830/79.930 to the euro – fairly in line with Friday’s close of 79.5356/euro. «The rate decisions are important for foreigners and for their carry trades. They are looking for signals where the dinar is heading to,» one currency dealer told Reuters. After the dinar’s 10 percent decline in the second half of November, banks say that levels between 79.00 and 80.00/euro indicate that the market has found equilibrium, for now. The dinar’s troubles started on November 19 on souring emerging market sentiment, political uncertainty and fears of violence if Serbia’s breakaway province of Kosovo declares independence. At the end of November, banks active in interbank forex market decided to halt trade to avoid any further dinar declines, but later decided to cut trading lots and widen spreads in an attempt to restart the market. The banks are now considering resuming normal trading routine with 1.0 million euro lots and 0.1 dinar spreads as of today. Earlier this month, central bank governor Radovan Jelasic ruled out any policy easing and said price pressures, fiscal expansion, soaring consumer demand and the weaker dinar would decide the next policy move.