By Sandor Peto
BUDAPEST, Aug 10 (Reuters) - Serbia's dinar tested 22-month highs against the euro on Thursday, outperforming other Central European currencies as the Serbian central bank left its key rate left on hold at 4 percent, the highest in the region.
The Serbian central bank did not follow the example of its Czech counterpart, which last week became the first in the region to lift interest rates for several years. While Czech inflation is above the central bank's 2 percent goal, the Serbian central bank's target range is higher, at 1.5 percentage points on either side of 3 percent. The bank does not need a rate hike to keep inflation within that target, while higher borrowing costs would weigh on economic growth, which at 1.3 percent in annual terms in the second quarter was well behind the regional pace.
A rate cut could weaken the dinar and help growth, but the bank has been unwilling to risk going against a trend towards rising global interest rates. It said concerns about uncertain monetary policy
developments abroad outweighed slower than expected growth at home. The dinar firmed 0.4 percent against the euro to 119.76 by 1049 GMT, retaining its early gains and staying near the 22-month highs reached a week ago at 119.40.
The central bank has repeatedly intervened in the market to keep the dinar in tight ranges, fighting dinar strength in the past several weeks. It has purchased at least 725 million euro and sold 345 million euros in the market so far this year. The dinar has been lifted in relatively illiquid summer trading, with state payments for some infrastructure projects and wholesale payments for agricultural products lifting demand for the currency.
Euro remittances from the more than one million Serbs living abroad also pick up in the summer. A Reuters poll of analysts last week predicted the dinar will ease to 123.9 against the euro by the end of July 2018. The poll projected stronger levels for the region's currencies than earlier forecasts as economic growth powers ahead in the region and its main foreign market, the euro zone.
Central European equities mostly softened on Thursday as global sentiment remained sour over political tension between North Korea and the United States.
The region's main stock indices were mixed and mostly outperformed Western European peers. Czech Moneta Money Bank fell 1.1 percent, even though the company reported higher than expected second-quarter earnings and said last week's central bank interest rate hike would improve its profitability.
Gains of Polish Alior Bank, which reported a rise in profits, mitigated the loss in Warsaw's bluechip equities index.