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Serbia kept its key policy rate unchanged as it seeks to ride out a surge in consumer prices without joining the wave of monetary tightening seen across central and eastern Europe.

The National Bank of Serbia left the benchmark rate at a record low of 1% for a twelfth month, in line with expectations. With a firm grip on the dinar and subdued core price pressures, the central bank is opting to stay put even as the headline inflation figure is more than double the 3% target and may not return to the goal before the second half of next year.

The first in Europe to cut borrowing costs when the pandemic hit the continent in 2020, Serbia’s rate setters want to avoid swings in the benchmark and prefer other tools to tighten economic conditions. The central bank ended repo securities auctions in October, previously used to supply liquidity to banks, and is also paying more to banks to drain extra cash from the market. 

Governor Jorgovanka Tabakovic has said the bank can wait with raising the benchmark at least while it stays above rates at the weekly reverse repo auctions. The average interest rate at the Dec. 8 tender was 0.34%.

Poland, the Czech Republic, Romania and Hungary are battling above-target inflation by cooling economies with higher borrowing costs. Meanwhile, Serbia capped prices of some staple foods and negotiated gas supplies from Russia at below-market terms through June to defuse some of the price pressures. In addition, the central bank keeps the dinar in a narrow range, helping to anchor inflation expectations.

The economy is seen expanding at least 7.5% this year, backed by the government’s generous pandemic relief programs that include cash handouts, wage and credit subsidies, which also fuel domestic demand and household consumption.

“Inflation is expected to peak in the last quarter of the year and early in 2022, with prints slightly above 7% y/y,” Erste Group Research said in a report on Tuesday. “The central bank might raise the benchmark “if inflation remains above the target band for longer than expected.”   

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