BELGRADE: Serbia's central bank bucked expectations for a rate hike on Thursday, keeping its benchmark interest rate on hold despite rising inflation and market concern over the bank's independence, which has hit the dinar currency.
Policymakers decided to keep the rate at 10.5 percent just days before an IMF visit where officials are set to voice concern over the independence of monetary policy after a legal change and the appointment last month of a lawmaker from the ruling coalition as central bank governor.
Eight out of 11 analysts and dealers polled by Reuters between Aug. 27 and Sept. 4 had predicted a fourth rate hike in as many months.
"Bearing in mind that the benchmark rate cannot effectively influence the dominant factors that are driving the rise in inflation, the Executive Board has decided to maintain the present level of restrictiveness of monetary policy," the bank said in a statement.
The bank said it expected "positive effects" on inflation and the exchange rate from the new government's policies aimed at increasing state revenues and cutting expenditures.
The Socialist-led government, which took power in July, has pledged to rein in a budget deficit of 7.1 percent of gross domestic product (GDP), but faces an economic contraction this year of 0.5-1.0 percent.
"What we really need to see is fiscal consolidation measures and whether the government will inject more money into agriculture to avert food price shocks in the future," said Sasa Djogovic of the Institute for Market Research in Belgrade.
The deficit, and public debt now at almost 55 percent of GDP, led the IMF to freeze a 1 billion euro ($1.26 billion) standby loan deal with the former Yugoslav republic in February, under the previous Democrat-led government.
The Fund, which is sending officials to Serbia on Monday, says it will not yet discuss a new arrangement, which Serbia needs to reassure financial markets.
Market nervousness over the government's economic policy, legislation stepping up parliamentary control over the central bank, and the size of the debt has driven the dinar currency to a series of lows against the euro.
The central bank has spent just over 1.3 billion euros this year defending the dinar. Foreign currency reserves, also needed as a backstop against external liabilities, stood at 10.14 billion euros in August, down from just over 12 billion at the start of the year.
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