Serbian Central Bank Leaves Rates Unchanged Despite Surging Inflation

• National Bank of Serbia (NBS) decided to leave its benchmark rate steady at 1% as expected for a 15th straight month in today's meeting.
• We have seen that the NBS has not followed its CEE peers in recent months, where central banks have been raising rates aggressively to curb inflationary pressures.
• Economic data showed last month that inflation accelerated to 8.2% YoY in January (vs. 8% exp..), up from 7.9% the previous month, diverging significant from the NBS 4.5% upper tolerance band.
• February inflation update will come out on March 11, expected to continue to accelerate (8.5% YoY).
• Policymakers are choosing to keep interest rates unchanged for two main reasons:
• First, it is likely that inflation is close to its peak and keeping rates low could limit the downside risks on the economic activity. Serbia is 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).
• The recent dramatic depreciation in CEE currencies must have added pressure on NBS to intervene into the FX market in order to 'defend their peg'.

Source: Bloomberg/MNI