May 8, 2018 / 1:02 PM / a year ago

Serbia's central bank to keep key rate at three percent

BELGRADE (Reuters) - Serbia’s central bank is expected to keep its benchmark rate at 3 percent when its executive board meets on Thursday, opting to remain cautious on strong dinar currency and low inflation, a poll showed on Tuesday.

Eleven out of 12 analysts and traders polled by Reuters this week and last said the central bank would leave the rate RSCBIR=ECI unchanged, following two cuts in as many months. One anticipated a 25-basis-point cut.

So far this year, the dinar has gained around 0.4 percent against the euro, while inflation RSCPIY=ECI fell to an annual 1.4 percent year-on-year in March, below the central bank’s target band of between 1.5 percent and 4.5 percent. The Statistics Office will announce April inflation data on May 11.

Serbia and the International Monetary Fund started talks on Monday about the new, non-financial deal to support reforms for growth.

The resignation of finance minister Dusan Vujovic who was instrumental in negotiating the previous 1.2 billion euro (1.05 billion pounds) deal with the IMF, should not influence the bank’s decision, said Sasa Djogovic, a economist with Belgrade’s Institute for Market Research.

“There’s ample money in the budget, the economy is on track, the IMF is here...the central bank even has room to cut the rate, but they will likely opt to stay cautious after two cuts,” Djogovic said.

The Serbian government, which ended the 2017 with a small fiscal surplus, pledged it will raise public sector wages and pensions this year on condition economic performance remains good.

Serbia’s economy expanded 2 percent in 2017 and is forecast to grow 3.5 percent this year. It rose 4.5 percent in the first quarter of 2018 according to a flash estimate.

In a note, the Erste Group said it expects that “the tone of monetary policy will remain unchanged throughout the year” after a surprise cut in April.

“Current low inflation ... is mainly a product of a low base and not the lack of demand, ... we expect a gradual acceleration of inflation in the second half of the year,” it said.

Last month, the bank said it cut the rate to boost lending and growth.

The Serbian government pledged it will raise public sector wages and pensions this year, on condition economic performance remains good.

Reporting by Aleksandar Vasovic; Editing by Angus MacSwan

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