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Serbia’s Next Move on Rate Leaves Economists Divided

A sign outside the headquarters of the Serbian National Bank, also known as Narodna Banka (NBS), in Belgrade, Serbia, on Tuesday, Jan. 17, 2023. Serbia, traditionally one of Russia's closest allies in Europe, is trying to put some distance between itself and Moscow as the war in Ukraine strains ties between the two countries and their leaders. Photographer: Oliver Bunic/Bloomberg (Oliver Bunic/Bloomberg)

(Bloomberg) -- Lingering price pressure in Serbia will be weighed up against robust economic growth, with economists divided over the central bank’s next move following the first interest-rate cut in more than three years.

The National Bank of Serbia will keep the one-week repurchase rate at 6.25% at a meeting Thursday, according to eight out of 14 analysts in a Bloomberg survey. The remaining six anticipate a second reduction of 25 basis points in as many months. 

Serbia’s central bank cut the key rate in June after the European Central Bank began easing. Policymakers in Belgrade had used the steepest monetary tightening cycle on record to bring headline inflation to within the Balkan nation’s target range, though the core measure remains more elevated. 

“The NBS might take a break and probably deliver its next cut in August, when a new set of macroeconomic forecasts will become available,” Mauro Giorgio Marrano, an economist with UniCredit SpA, said in a July 5 note.

The consumer-price index returned to the high end of central bank’s tolerance band of between 1.5% to 4.5% in May and is seen slipping to 4.2% in June. Core inflation, though, stood at 5% in May. The statistics office will release its inflation reading for last month on Friday.

“Sticky momentum in core inflation, strong domestic demand and uncertainty regarding the pace and timing of easing by the ECB and the Fed suggest a cautious approach,” Marrano said. Still, he expects Serbia to reduce the benchmark to 5.5% by the end of the year and to 4.5% in 2025.

Despite the monetary tightening campaign, the economy gained pace in every quarter of 2023, while growth in the first three months of this year exceeded most forecasts. The government sees an expansion of 3.5% for 2024, though Finance Minister Sinisa Mali said on Wednesday it might reach 4%.

The authorities have also grappled with an appreciation in the dinar. The central bank purchased a net €1.33 billion ($1.4 billion) from January to June, including €695 million last month alone, as it keeps the national currency in a narrow range against the euro in a so-called managed float.

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