Serbia holds rate as cautious monetary policy warranted

    Serbia's central bank maintained its policy rate at 9.5 percent, noting that inflation had now returned to the bank's target range in January but adding that caution was warranted in monetary policy due to "heightened volatility in international financial markets" that is dampening investor sentiment and may negatively influence capital flows.
    The Bank of Serbia (NBS), which intervened on foreign exchange markets on Monday after repeated interventions last month to support the dinar currency, also stressed the need for caution last month, saying the country was still in need for external financing despite rising exports.
    "By keeping the key policy rate on hold, the NBS aims to support price and financial stability in the medium term," the central bank said, adding that consistent implementation of fiscal consolidation measures should diminish the country's exposure to external risks and strained liquidity in global financial markets in connection with reduced asset purchases by the U.S. Federal Reserve.
     Further steps in reducing the country's foreign exposure and maintain economic stability and growth would come from the expected conclusion of an agreement with the International Monetary Fund, the central bank said.
    Talks between the IMF and Serbia's government started last month on a new agreement but the government needs to narrow its deficit further and save some 400 million euros.

    Serbia's inflation rate rose to 3.1 percent in January from 2.2 percent in December, returning to the central bank's target range of 2.5 percent to 5.5 percent, around a 4.0 percent midpoint.
   The central bank cut its rate by a net 175 basis points in 2013 as inflation slowed to a low of 1.6 percent in November. The bank expects inflation to rise in coming months due to higher administered prices and the one-off impact of higher value-added-tax on some goods in January.
    Serbia's economy pulled out of recession in 2011 and 2012, with Gross Domestic Product expanding by an annual rate of 2.6 percent in the fourth quarter of 2013.
    The bank, which has forecast growth of 1.5 percent in 2014, said manufacturing was growing in the beginning of this year, laying the foundation for growth this year that will be helped by a recovery of the euro area and the start of negotiations on accession to the European Union (EU).

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