The National Bank of Serbia (NBS), which has maintained its rate since cutting it to the current level in July 2016, added its policy decision was also guided by the effect of past monetary easing.
In its previous inflation report from February, the central bank forecast that inflation would enter its tolerance band in the first quarter of this year and remain within that range until the end of 2018, helped by rising prices of food, oil and cigarettes.
This year the central bank targets inflation of 3.0 percent, plus/minus 1.5 percentage points.
The central bank also forecast in February that Serbia's economy would expand by 3.0 percent this year, up from 2.7 percent in 2016, and then by 3.5 percent in 2018.
In the first quarter of this year Serbia's economy grew by an annual rate of 1.0 percent, down from 2.5 percent in the fourth quarter.
Starting in May 2013 the NBS embarked on an easing cycle that concluded in July 2016 after rate cuts that totaled 7.75 percentage points as inflation gradually decelerated from close to 13 percent in October 2012.
Serbia's inflation rate accelerated to 4.0 percent in April from 3.6 percent in March as prices rose for fruits and vegetables due to adverse weather while the cost of fresh meat was higher than seasonally expected.
The NBS expects these one-off price hikes to drop out of the annual comparison so inflation will be below its current level early next year and the remain steady until the end of its projection period.
Illustrating that headline inflation has been affected by temporary factors, the central bank said core inflation was 2.0 percent in April and has been low and relatively stable.
After depreciating in the second half of 2015, Serbia's dinar was relatively steady through 2016 but has been trending firmer in the last month. The central bank has often stepped into the market in recent years and dealers reported seen it buying euros in late April at 122.95 to the euro.
Today the dinar was trading at 123.13, hardly changed from 123.07 at the start of the 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 4.0 percent.
In making the decision, the NBS Executive Board was guided by inflation factors, the effects of past monetary easing and the May inflation projection according to which inflation will continue to move within the target tolerance band of 3.0%±1.5 percentage points in the next two years.
Since the start of the year, inflation has moved within the target tolerance band, equalling 4.0 % y-o-y in April. Similarly to other countries, such inflation movements were driven, as expected, by the recovery of global oil prices in the second half of 2016. The increase in fruit, vegetable and firewood prices caused by adverse weather conditions early this year and the rise in fresh meat prices in April were higher than seasonally expected. As these one-off price increases will be dropping out from the annual comparison, we expect inflation early next year to be below its present level and to continue to move at that level until the end of the projection horizon. Since the beginning of this year, inflation movements were under the influence of one-off factors, as indicated by low and relatively stable core inflation of 2.0% y-o-y in April.
The NBS Executive Board is carefully monitoring the developments in the international environment, notably in the international financial market and trends in global commodity prices. Uncertainties in the international financial market emanate mainly from the divergence of monetary policies of the leading central banks – the Fed and the ECB, which may affect global capital flows to emerging economies, including Serbia. Uncertainties also relate to movements in global prices of primary commodities, particularly oil. However, as underscored by the NBS Executive Board, the resilience of our economy to potential negative shocks from the international environment increased owing to more favourable macroeconomic prospects, primarily the narrowing in fiscal and external imbalances, which contributes to a lower risk premium and improved credit rating of the country.
At its meeting today, the NBS Executive Board adopted the May Inflation Report, which will be presented to the public on Friday, 19 May, when monetary policy decisions and the underlying macroeconomic developments will be discussed in more detail.
The next rate-setting meeting will be held on 8 June 2017."
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