Serbia raises rate by 75 bps

BELGRADE (Reuters) – Serbia’s central bank hiked its key policy rate by 75 basis points yesterday, surprising the market with a move to address the weakness of the dinar in the aftermath of Kosovo’s secession. The bank was also reported to be selling euros in the market after the rate announcement amid strong client demand for euros. «The monetary board discussed ongoing economic developments and decided to raise the benchmark rate by 0.75 percentage points to 11.5 percent,» the bank said in a brief statement. «The repo rate at 11.5 percent is just about enough to calm down the dinar,» said Dusko Vasiljevic of FREN/CEVES think-tank. Agata Urbanska, Emerging Europe economist at London-based ING bank said the current situation is «exceptional.» «Political instability is very high and it is sort of appropriate from the central bank to try to support the currency in the face of it,» she said. Dealers said the mix of measures – rate hikes and covert interventions – could keep the market in check for a while. «But the overall impression is that they actually have to pay for stability from their currency reserves,» the currency dealer said. «That’s an omen.» The decision to raise rates followed a week of dinar volatility, with a worried central bank spending a total of -60 million in covert interventions to provide liquidity as banks refrained from buying and selling. The dinar’s woes began a week ago, after Kosovo declared independence. Recognition of the southern province by the United States and major European Union countries led Belgrade to recall its ambassadors and caused sometimes-violent protests, souring market and investor sentiment. Some analysts say the bank is desperately trying to attract foreigners back to repos as politics weigh on cash flows. «The main problem is how to get cash now that portfolio and other investment appear to have abandoned Serbia and cross-border financing is falling,» one Belgrade-based foreign banker said.