Serbia leaves rate on hold as inflation continues to fall

    Serbia's central bank left its key policy rate steady at 11.0 percent, saying inflation continues to decline due to lower demand and repeated that it should return to the central bank's target range by October.
    The National Bank of Serbia (NBS), which embarked on a monetary tightening campaign last year to hold down inflation before cutting rates by a total of 75 basis points in May and June, said a good agricultural season and global market prices should lower domestic food prices and a deceleration in credit activity and lower growth in wages "confirm that low aggregate demand will continue to be the key disinflationary factor in the period ahead."
    Serbia's inflation rate eased to 9.9 percent in May from 11.4 percent the previous month, continuing the decline since hitting a recent high of 12.9 percent in October last year. The central bank targets inflation of 4.0 percent, plus/minus 1.5 percentage points.
    Like other emerging markets, Serbia's markets have been hit by an outflow of funds from the Federal Reserve's plan to taper quantitative easing later this year, and the central bank last month intervened in foreign exchange markets several times to slow the decline in the dinar.

    From the beginning of May through July 9, the dinar has depreciated just over 3 percent against the euro, quoted at 114 to the euro earlier today.
    "Unfavourable movements in international financial markets have led to higher investor risk aversion, which has sparked an increase in risk premia and depreciation pressures almost throughout the  region," the central bank said.
    The central bank again appealed to the government to reduce its deficit further. Last month the government said it would cut spending to reduce this year's deficit to 4.6 percent of Gross Domestic Product after the International Monetary Fund warned is could reach 8 percent.
    "The Executive Board holds that the effects of additional fiscal consolidation measures and the implementation of structural reforms will contribute to further subsiding of inflationary pressures and aggregate demand and will help increase investor interest in the Serbian economy."

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