Serbia holds rate due to international risks as inflation falls

    Serbia's central bank held its key policy rate steady at 11.0 percent for the second month in a row, saying that the decision to maintain rates "was swayed by risk risks arising from the international environment" as inflationary pressures continue to subside.
    The National Bank of Serbia (NBS), which last cut its rate in June, confirmed that inflation is expected to return to the bank's target range by October and remain within the band thereafter. This expectation includes the impact of higher administered prices the rest of the year.
    Serbia's inflation rate eased to 8.6 percent in July from 9.8 percent in June, continuing a declining trend since October last year when when inflation hit 12.9 percent. In response to rising inflation in the second half of 2012, the NBS started raising rates but started cutting in May as inflation started to fall.
    In recent months, the central bank has said it expects inflation to return to its target range of 4.5 percent, plus/minus 1.5 percentage points in October.
    "The NBS executive board concluded that inflationary pressures have continued to subside on account of not only past monetary policy measures, but also largely due to reduced costs in food production as this year's agricultural season is much more favourable both globally and at home," the central bank said.

    Like many other emerging markets, Serbia has experienced an outflow of capital and currency depreciation since May and the central bank intervened several times in June to slow the decline.
    Since mid-June the Serbian dinar has continued to ease but the pace has been much more controlled. Since the beginning of the year, the dinar is down 2.7 percent against the euro, trading at 115.41 today.
    As last month, the central bank said the negative effects from international environment could largely be offset by consistent implementation of fiscal consolidation and structural reform by the government.
    "This would positively affect Serbia's investor perception and contribute to the narrowing of internal and external imbalances, lower inflation and sustainable economic growth," the bank said.
    Serbia's economy continued to slowly improve in the second quarter of this year, with Gross Domestic Product rising 0.7 percent year-on-year, down from 2.1 percent annual growth in the first quarter, but still much better than the contraction throughout 2012.
    The central bank said its assessment of the recovery was still positive, but gave no further details.
    Last month the central bank said in its quarterly report that it would consider lowering its benchmark interest rates if external risks ease and the government cuts spending.
    The central bank expects growth this year of 2.0 percent, but cut its 2014 growth forecast to 2.5 percent from an earlier forecast of 3.0 percent.
   
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