Serbian Central Bank Hikes Rate For First Time In 9 Years

• National Bank of Serbia (NBS) surprised the market today and raised its benchmark rate by 50bps to 1.50% (vs. 1.25%).
• It is the first time that the NBS raises its policy rate in the past 9 years after gradually cutting its 1W repo rate from 11.75% in March 2013 to 1% in December 2021.
• We have seen that the NBS has not followed its CEE peers in recent months (until today), where central banks have been raising rates aggressively to curb inflationary pressures.
• Economic data showed last month that inflation accelerated to 8.8% YoY in February (vs. 8.5% exp..), up from 8.2% the previous month, diverging significantly from the NBS 4.5% upper tolerance band.
• March inflation update will come out on April 12, expected to continue to accelerate (9% YoY).
• Policymakers had chosen to keep interest rates unchanged for two main reasons:
  • First, it is likely that Serbia has been partly relying on its CEE peers' 'effort' (NBP, CNB and NBH), hoping that the gradual decline in inflation in H2 2022 will also have an impact on the domestic inflation.
  • Second, the Serbian Dinar (RSD) seems pegged to the EUR at 117.60, therefore the NBS may mirror the ECB policy outlook in order to avoid currency interventions as rising interest rate differential will drive RSD higher (vs. Euro).
• However, the Russia/Ukraine conflict eventually 'forced' NBS policymakers to act as inflation is now expected to remain elevated longer than previously expected.

Source: Bloomberg/MNI