The National Bank of Serbia (NBS), which last lowered its rate in April after a 5-year easing cycle, said inflation had returned to its target range in August after accelerating for four months in a row, driven by rising demand and inflation expectations are now anchored around the 3.0 percent target both one and two years ahead.
Serbia's inflation rate rose to 2.6 percent in August after hitting a 2018 low of 1.1 percent in April. The NBS targets inflation of 3.0 percent within a target range of plus/minus 1.5 percentage points.
The central bank has cut its rate by a total of 50 percent points this year and by a total of 8.75 percentage points since May 2013 when it embarked on a easing cycle.
Boosted by strong demand, investments and exports, Serbia's economy has "risen vigorously" since the beginning of this year, at the highest rate in the past 10 years, helped by the rate cuts, the central bank said.
The NBS expects growth this year to exceed 4.0 percent, up from its September forecast of around 4 percent, with a significant contribution from a rise in foreign direct investment that will ensure "vibrant growth in manufacturing exports going forward," NBS said.
Serbia's economy expanded by a higher-than-expected 4.8 percent year-on-year in the second quarter of this year, down from 4.9 percent in the first quarter.
Earlier this month the International Monetary Fund raised its 2018 growth forecast to 4.2 percent and from 3.5 percent and projected 2019 growth of 3.5 percent.
As in recent months, the NBS said global developments are still calling for "caution" in monetary policy due to volatile oil prices and monetary policy tightening by the U.S. Federal Reserve and a wind-down of quantitative easing by the European Central Bank (ECB) that could affect capital flows to emerging markets.
"Besides, growing protectionism in international trade has dampened investor mood and stirred uncertainties in international financial market," NBS said, adding Serbia's economy is resilient due to potential negative international effects owning to its macroeconomic fundamentals.
Serbia's dinar has been under upward pressure in the last year, with the central bank reportedly buying over 1.6 billion euros to hold it down. The NBS operates a managed float exchange rate regime.
The dinar was trading at 118.6 against the euro today, largely unchanged from 118.9 at the start of the year.
The National Bank of Serbia issued the following statement:
"At its meeting today, the NBS Executive Board voted to keep the key policy rate on hold, at 3.0%.
In making such decision, the Executive Board was guided by the expected movement in inflation and its underlying factors, and the effects of past monetary policy easing. After reaching this year’s low in April, inflation returned within the target tolerance band, in line with expectations, and touched 2.6% in August. The Executive Board expects that year-on-year inflation will continue to move within the target tolerance band in the next two years. In the medium run, it will be driven mainly by the gradual rise in aggregate demand. Both the financial and corporate sectors expect that the achieved price stability will be maintained in the coming period, as reflected in their inflation expectations anchored around the 3% target for both one and two years ahead.
The Serbian economy has been rising vigorously since the start of the year, at the highest rate in the past ten years, aided also by the past monetary policy easing of the NBS. As assessed by the Executive Board, economic growth will exceed 4% this year, with a significant contribution coming from investment, which will ensure the continuation of vibrant growth in manufacturing exports going forward. The investment upturn is also supported by favourable financing conditions and lending growth. Furthermore, the net FDI inflow, which comfortably covers the current account deficit, is contributing to a reduction in external imbalance in the medium term through the impact on export growth.
The Executive Board judges that caution in monetary policy conduct is still mandated, primarily because of developments abroad. Global oil price movements remain volatile, even though oil futures indicate the stabilisation of prices until the end of the year. Given the rise in global oil prices, inflation in the international environment is also somewhat higher this year. The expected further monetary policy tightening by the Fed and a wind-down of the QE programme by the ECB in the remainder of the year could affect capital flows to emerging markets. Besides, growing protectionism in international trade has dampened investor mood and stirred uncertainties in the international financial market. Nevertheless, the Executive Board points out that the resilience of our economy to potential negative effects from the international environment has increased, owing to improved macroeconomic fundamentals and overall prospects.
The next rate-setting meeting is scheduled for 8 November."
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