In its first policymaking meeting since the ouster in late July of Mladjan Dinkic as finance minister, Serbia's central bank kept its benchmark interest rate on hold at 11% on August 8.
With annual inflation through July dipping below double digits for the first time in a year, there was space for the bank to cut rates to support the fragile recovery. However, political risk has risen recently with the jettison by the coalition - now featuring the Serbian Progressive Party and Socialist Party - of Dinkic's small, fiscally conservative, party URS.
That has caused concern among investors and put the dinar under the threat of a further sell-off. Keeping rates higher will mitigate some of that pressure. Following the central bank's announcement, the currency firmed slightly against the euro to 113.75 from 113.9 earlier, Reuters reported dealers as saying.
Timothy Ash, head of emerging markets research at Standard Bank, says the move was expected given the market concerns over domestic political stability and the exit of Dinkic. He adds that Jorgovanka Tabakovic, head of the National Bank of Serbia (NBS), has done a commendable job, "proving open minded and pragmatic, and willing to take the advice of her strong bench of deputy governors. Arguably the NBS is now a key anchor for Serbia in fairly testing times on the political front."
Analysts say once a new cabinet is put together and Serbia commits to a new programme with the International Monetary Fund, then there could be significant scope for further rate cuts. The central bank predicts annual inflation will slide within its target band of 3-6% by the end of October, having dipped to 9.8% in June.
"The (bank's) Executive Board believes that additional measures of fiscal consolidation and structural reforms will contribute to further easing of inflationary pressures," it said in a statement. The next rate-setting meeting is set for September 12.
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