With low inflation target, Serbia likely to keep rates steady today

BELGRADE (Reuters) – Serbia’s central bank is set to keep its interest rates on hold at a policy meeting today, as it assesses whether price pressures and fiscal spending should warrant policy change, a Reuters poll showed on Tuesday. Looking a year ahead, analysts expect the broad picture to remain largely unchanged, with core inflation – the main element of central bank concern – safely inside its 3 to 6 percent targeted band, and the dinar currency firming in real terms. A Reuters poll of analysts and currency dealers at 16 banks and one economic think tank showed 14 respondents expect no immediate change in the two-week repo rate, while three saw a 25 basis point rate hike this week. But they were split on the longer-term outlook, with nine expecting policy easing, three no change and five a tighter monetary stance. The central bank last cut its key policy rate in October, by 25 basis points to 9.5 percent, to put a brake on the dinar, which at the time was trading at a three-year high. Banks on Tuesday cited strong client demand for euros as importers buy that currency to meet end-of-year payment deadlines. «There is hardly a reason for the central bank to change its benchmark rate ahead of holidays,» one currency dealer said. Election spending «But as we enter the first quarter, we may see soaring price pressures, whether we talk about crude oil or domestic price hikes and higher state spending ahead of elections,» a treasury analyst said. «So they could be tempted to tighten a bit.» Analysts at the FREN/CEVES economic think tank said the bank’s core inflation target for 2008 meant the dinar would have to stay fairly firm, offsetting price pressures and high consumer demand in the economy while political concerns continue to sour investor sentiment. «The bank has set a very low inflation target and, considering a variety of macroeconomic and political risks and perhaps even times of turbulence, there is a chance of a slight policy tightening,» Jasna Dimitrijevic of FREN/CEVES said. «In that case, the dinar would appreciate at least in real terms.» With a growing prospect of losing part of its territory, as a majority of Western countries back independence for breakaway Kosovo province, Serbia has stepped up anti-Western rhetoric threatening to sour future ties with the EU if it lost Kosovo. «I hate to think about cataclysmic scenarios, because in that case, inflation, dinar or interest rates would not really matter,» one bank analyst said. «But once politics settle, investor sentiment will improve and I’d expect relatively solid economic fundamentals to attract investors back.» Economic risks in 2008 include further strong price pressures, high public spending and consumer credit, a wide current account deficit and not enough investment to finance it. Unlike the market, the government is upbeat about investment prospects, with Economy Minister Mladjan Dinkic expecting Serbia to woo around $6.0 billion a year in the next three years. The year-ahead forecasts show the market betting on a fairly tame core inflation, with a median forecast of 5.0 percent.