Trick Or Treat: Serbia’s 200bps Hike
This Halloween has proven particularly ghoulish for Serbian borrowers. On October 31, the National Bank of Serbia became the second European central bank in as many weeks to hike rates sharply, raising its policy rate by 200bps to bring it to 17.75%. This followed the National Bank of Hungary’s October 22 decision to hike its benchmark rate by 300bps (to 11.50%).
As in Hungary, in Serbia the currency had been coming under increasing pressure amid the current global financial climate, breaching a major trading range to the downside in the process. Certainly, the dinar was looking likely to depreciate toward its record low of RSD88.62/EUR and potentially beyond. Unlike in Hungary though, the core concern over depreciation was less to do with refinancing problems for FX-denominated loans and more to do with the impact on inflation. Indeed, Serbia’s consumer price dynamics bucked the regional trend, ticking up to 10.5% y-o-y according to latest data for October.
Exchange Rate, RSD/EUR
This begs the question though, whether the rate hike was really necessary. Whereas in Hungary’s case, the monetary authorities were staring a systemic banking system crisis in the face, with the level of housing loan defaults expected to spike dramatically on the back of spiralling repayment costs for euro and Swiss franc loans. The NBS cannot claim the same level of urgency. Moreover, even with the increase in consumer price growth in October, I stick with the view that the medium-term outlook is fundamentally disinflationary. As such, I think that it is incredibly narrow-sighted for a central bank to be preoccupied with inflation amid collapsing commodities prices and the ever increasing risks of pan-regional recession. Indeed, to hike rates now will simply accentuate the already tightening credit conditions in the country, strangling the domestic consumer at a time when confidence is likely to fall off significantly.
With Serbia following the Hungarian precedent, this begs the question: are there any other central banks in emerging Europe likely to follow suit? Well, the only place that comes to mind is Romania. Like Hungary and Serbia, Romania already has very high rates (10.25%), still high inflation and a markedly depreciating currency. Moreover, the central bank has already shown itself as willing to be proactive to prevent further currency losses through direct interventions in the FX market. If there’s going to be another several hundred basis point hike, it will be in Bucharest.