The National Bank of Serbia (NBS), which has cut its rate by 200 basis points this year, said its economy could suffer "indirect negative effects of the Greek crises" through a reduction in capital flows and a higher cost of debt servicing despite its "relatively small" economic links with Greece.
However, the NBS added that Serbia's exposure to external shocks, and the sustainability of its public finances, had been reduced due to the successful implementation of fiscal consolidation measures and structural reforms along with the arrangement with the International Monetary Fund.
Serbia's inflation rate eased to 1.5 percent in May from 1.8 percent in April - below the central bank's 2.5 to 5.5 percent target range - but the NBS said it expected inflation to return to its band "in coming months," a slight change to its view in June when it said it expected inflation to return to its band in the second half of this year.
The National Bank of Serbia issued the following statement:
"At its meeting today, the NBS Executive Board decided to keep the key policy rate at 6%.
Following the analysis of monetary and macroeconomic trends and projections, the Executive Board judged that year-on-year inflation is moving below the lower bound of the target tolerance band, but is expected to return within the band in the coming months.
Inflation’s return within the target band will be aided by the effects of past monetary policy measures and factors exerting temporary disinflationary effect in the prior period, such as the expected growth in administered prices and the diminishing impact of a decrease in prices of primary commodities. Dented aggregate demand and low inflation abroad will continue to generate more lasting disinflationary effects. The Executive Board noted that the results of economic and foreign trade activity have improved from the start of the year which, coupled with fiscal consolidation, has contributed to the reduction in external imbalances and stabilisation of the foreign exchange market.
Inflation’s return within the target band will be aided by the effects of past monetary policy measures and factors exerting temporary disinflationary effect in the prior period, such as the expected growth in administered prices and the diminishing impact of a decrease in prices of primary commodities. Dented aggregate demand and low inflation abroad will continue to generate more lasting disinflationary effects. The Executive Board noted that the results of economic and foreign trade activity have improved from the start of the year which, coupled with fiscal consolidation, has contributed to the reduction in external imbalances and stabilisation of the foreign exchange market.
In making the decision to keep the key policy rate unchanged, the Executive Board bore in mind the effects of monetary policy easing so far and its impact on the expected return of inflation to within the target tolerance band, as well as of potential risks associated with the Greek crisis, which suggest caution. Despite the fact that direct effects on the Serbian economy, stemming from the economic relations with Greece, are relatively small, the Executive Board estimated that there are risks in the form of indirect negative effects of the Greek crisis on capital flows and the cost of debt servicing by emerging economies, Serbia included.
The Executive Board assessed that the continued successful implementation of fiscal consolidation measures and structural reforms, along with the recently concluded arrangement with the International Monetary Fund, have significantly contributed to the sustainability of public finances, as well as to the reduction of Serbia's exposure to external shocks and the negative effects which may arise from the above risks.
The next rate-setting meeting of the Executive Board will be held on 13 August 2015."
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