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Serb cbank hikes policy rate by 75 bps to 15.25%

Serbia’s central bank raised its key policy rate for the fourth time this year on Thursday, hiking it by 75 basis points to 15.25% in a move seen by analysts as a response to price pressures and political risks.

A Reuters poll on Wednesday found analysts and currency dealers expecting the National Bank of Serbia to leave rates unchanged at its rate-setting meeting on Thursday, saying no rate level would be high enough to offset political risks. Governor Radovan Jelasic will speak about the decision at a 1030 GMT news conference. “The central bank appears to be disturbed by the risks and we read this rate hike as pre-emptive,” Dusko Vasiljevic of FREN/CEVES think-tank told Reuters. “It is certainly not a wrong move, but it could be interpreted as a signal of nervousness,” he said. “Also, they seem to have been looking for clues at various indicators, including money market rates.”

The two-week Belgrade Interbank Offered Rate stood at 15.57%, while the overnight was 14.61% on Thursday. Zoran Petrovic, deputy chairman of the managing board at Raiffeisenbank in Belgrade, said the rate hike came in response to strong price pressures, fuelled by expensive food and record high crude oil prices, as well as political tensions at home. “If you look at other countries with high current account deficits, such as Iceland or Turkey, you can see the same monetary policy patterns,” he said. The 2007 current account gap was close to 17% of GDP. The National Bank of Serbia last raised its two-week repo rate by 300 basis points to 14.5% in mid-March, trying to prop up the dinar and cut import prices in an economy heavily reliant on imports.

An early general election is being held on May 11, and Jelasic told foreign businessmen on Wednesday the bank’s future policy direction would be dictated by the country’s medium-term outlook rather than by short term considerations. The dinar gained a further 0.5% in an active morning trade on Thursday, with banks pricing the currency at around 79.60/euro at 1000 GMT, its strongest level since December 2007.

Dealers say the dinar has been bolstered by stronger euro selling ahead of Orthodox Easter and Labor Day holidays and some still suspecting there has been a capital increase in the banking sector. (Reuters)