Serbia will probably lift borrowing costs again to tackle persistent inflation, remaining the last country in eastern Europe to continue monetary tightening as the rest of the region has already halted interest-rate hikes.
(Bloomberg) — Serbia will probably lift borrowing costs again to tackle persistent inflation, remaining the last country in eastern Europe to continue monetary tightening as the rest of the region has already halted interest-rate hikes.
The central bank will lift its one-week repurchase rate by a quarter percentage point to 6% on Thursday, according to 11 of 17 analysts in a Bloomberg survey. The rest expect no change.
The Balkan nation has increased its main rate in a year by a cumulative 475 basis points to the highest level since 2015.
The National Bank of Serbia, a latecomer to the region’s rate-hike frenzy, may need to extend monetary tightening as inflation keeps surprising on the upside and a planned increase in regulated energy costs is poised to add to price pressures.
By contrast, Romania, the Czech Republic and Poland have been holding rates unchanged in anticipation that price growth will continue to ease this year.
“The latest upside surprise of inflation on the domestic front would justify further monetary policy tightening,” Jakub Kratky, a Prague-based analyst at Generali Investments, said of the Serbian rate meeting.
The central bank could be forced to “deliver a bit more” as there are signs that the turmoil in the banking system has settled and major global central banks also added further hikes, he added.
The International Monetary Fund, which has a $2.5 billion financing program with Serbia, has urged policymakers not to end the tightening cycle prematurely.
The government is following IMF’s advice in bringing the capped retail prices of electricity and gas closer to market levels. They’re set to rise by 8% and 10%, respectively, in May, pushing up costs of an array of products.
Even core inflation, which excludes the most volatile prices such as energy and food, has been in double-digits since December. It came in at 11.1% in February.
Still, the central bank’s most recent quarterly outlook said inflation would begin to ebb from the second quarter and probably slow below 10% by the end of the year. Its return to the 1.5%-4.5% target range is expected in mid-2024.
Central bankers are also wary about fragile economic growth, which has been slowing for almost two years and showed an annual expansion of 0.4% in the final quarter of 2022.
–With assistance from Harumi Ichikura.
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