Serbia to hike interest rate despite slowdown

Serbia will probably hike borrowing costs as the fastest inflation in more than a decade overshadows the risks of a sharp downturn in economic growth.

The National Bank of Serbia will lift its benchmark interest rate by 50 basis points to 4.5%, according to nine of 16 economists in a Bloomberg survey. Five expect a quarter-point increase and two see the rate staying at 4%.

The central bank has said that inflation, mainly driven by the prices of food and fuels, probably peaked in September at 14% from a year earlier, the highest since 2011. But the survey indicates the consumer-price index inched up last month, with the Statistics Office due to publish October price data on Monday.

“An external monetary policy outlook suggesting that interest rates will stay high for longer should force the NBS to hike further,” according to Jakub Kratky, an analyst at Generali Investments in Prague, who sees a 50 basis point increase. “An announcement from the central bank that inflation is already at its peak may be a bit premature.”

A latecomer to the hike frenzy in the region, Serbia began increasing its benchmark in April after trying to counter the price pressures with other tightening tools. Rate setters had focused on core inflation, but even that gauge, at 8.6% in September, has long exceeded the Balkan nation’s 1.5% to 4.5% tolerance band.

The central bank has tried to shield the economy from high borrowing costs, anticipating weaker demand in the European Union, Serbia’s top trading partner. Growth plunged in the third quarter to 1.1% from a year earlier, compared with 4% in the first half.

—Bloomberg