BELGRADE: Serbia's central bank unexpectedly cut its benchmark interest rate for the first time in four months on Thursday, setting aside concerns over a weakening dinar to tackle doggedly low inflation.
The 25 basis point cut to 4.25 percent was the first since the Federal Reserve raised US rates in December, which may tighten the supply of cheap dollars and make investors more cautious about riskier assets in emerging markets such as Serbia.
The decision bucked expectations of a majority of 18 dealers polled by Reuters, 15 of whom said they expected the bank to keep rates on hold again.
Three had predicted a 25 basis-point cut.
January inflation stood at 1.5 percent year-on-year, far below the bank's target range of between 2.5 and 5.5 percent. In a statement, the bank's executive board cited low inflationary pressure in the country and abroad mainly due to lower oil prices.
It also said the slower pace of growth in China would weight on economic activity in Europe and the United States.
"In such circumstances, it is possible that normalisation of Federal Reserve monetary policy would occur at a slower pace than expected," the bank said in the statement.
"The central bank expects monetary policy easing will be followed by lower interest rates (of commercial banks) and the continuation of the recovery of credit activity, which will all contribute to higher investment." The next monetary policy meeting is scheduled for March 17.
The central bank cut rates to a record low of 4.5 percent from 8 percent over the course of 2015, responding to a government policy of fiscal consolidation agreed under a 1.2 billion-euro loan deal with the International Monetary Fund, as well as to low inflation and quantitative easing in the United States and Europe.
The dinar, however, has lost 1.1 percent in value against the euro so far this year, forcing the central bank to tighten monetary policy and sell 260 million euros since the turn of the year to slow the slide.
The currency weakened slightly following the bank's decision, trading at 122.9 to the euro from 122.7 before the rate move. Serbia's economy is forecast to grow 1.8 percent this year following projected 0.8 percent growth in 2015.
The EU-candidate country's debt amounts to 77 percent of national output, much higher than recommended by the IMF for similar emerging economies.
Around 80 percent of the public debt is in foreign currency -- euros and US dollars - while the remainder is in dinars.
"As long as the share of dinar securities in the country's debt is low, weakening of the dinar to the euro or the dollar will be considered as a great fiscal risk," Serbia's top economic advisory body, the Fiscal Council, wrote in its monthly report this week.
The country faces a snap election, likely in late April or early May, as conservative Prime Minister Aleksandar Vucic seeks a fresh mandate to pursue European Union integration, but potentially delaying some economic reforms.
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