The National Bank of Serbia (NBS), which has maintained its rate since ending a 5-year easing cycle in April 2018, added medium-term inflation expectations in the financial and corporate sectors also see inflation within its target range of 3.0 percent, plus/minus 1.5 percentage points.
Serbia's inflation rate has been low and stable for the last 6 years though it rose to 2.4 percent in February from 2.1 percent in January, the highest rate since August last year on higher prices for food and on-alcoholic beverages, recreation and culture.
As in March, the bank's board said the slowdown in global economic growth, the normalization of monetary policy by the Federal Reserve and the European Central Bank will be slower than expected and it is uncertain to what extent this process will differ from market expectations, which may trigger volatility in the flow of global capital.
Though trade tensions have eased, NBS said protectionism and geopolitical tensions persist, making developments in commodity and financial markets uncertain, mandating caution in the conduct of its monetary policy.
Serbia's economy slowed in the second half of 2018 but NBS expects growth this year to be led by domestic demand, such as investment and consumption, while foreign direct investments, which has more than fully covered the current account deficit for more than 4 years and hit 3.2 billion euros in 2018, will continue to reduce external balances.
Serbia's gross domestic product slowed to annual growth of 3.4 percent in the fourth quarter of 2018 from 4.1 percent in the third quarter and in its February inflation report the NBS forecast growth in 2019 of 3.5 percent before accelerating to 4.0 percent in 2020, led by investments, exports and sustainable growth in household consumption.
Inflation is projected to slowly rise toward the midpoint of the target range in coming months as the effects of past appreciation of the dinar wane and higher fruit and vegetable prices, the regular adjustment of excise taxes on cigarettes and the increase in utility prices.
But a drop in petroleum product prices due to the drop in global oil prices in late 2018 and a season fall in the prices of travel and fresh meat will have disinflationary pressures.
As in 2018, the NBS steps into the foreign exchange market on occasions, including last week, buying euros to keep the dinar from rising too much. The NBS maintains the dinar in a managed float against the euro.
The NBS has been reported by dealers to purchase euros when the dinar rises below 118 to the euro and today the dinar was trading at 117.93 to the euro, up from 118.15 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 the decision, the Executive Board was guided primarily by the expected movement of inflation and its underlying factors in the domestic and international environment.
Inflation has been moving in line with the Executive Board’s expectations – it has been low and stable for the sixth year in a row, measuring 2.4% y-o-y in February. Core inflation trended similarly, equaling 1.3% y-o-y in February. The Executive Board expects inflation to remain stable within the target tolerance band (3.0±1.5%), while medium-term inflation expectations of the financial and corporate sectors are moving along the same lines.
The NBS Executive Board deems that caution in monetary policy conduct is still mandated, most notably because of developments in the international environment. Due to the slowdown in global economic growth and inflation, the normalisation of monetary policies of leading central banks, the Fed and the ECB, will be slower than expected. It remains uncertain, however, to what extent the normalisation will differ from market expectations, which may trigger the volatility of global capital flows. After falling late last year, global oil prices have been on a rise since the start of this year. Their movement remains uncertain due to a number of factors – both on the supply- and demand-side. Though trade tensions among the leading world economies have eased, protectionism in international trade and geopolitical tensions persist, making the developments in the international commodity and financial markets uncertain.
As emphasised by the Executive Board, our economy’s resilience to potential adverse effects from the international environment amplified owing to reduced internal and external imbalances and a favourable macroeconomic outlook. As in the previous two years, public finance recorded a surplus at the start of this year, while the current account deficit has been more than fully covered by the net FDI inflow for more than four years. The Executive Board expects that this year economic growth will be led by domestic demand, i.e. investment and consumption, while FDI, which boosts production and export capacities, will lead to a gradual reduction in external imbalances in the medium run.
The next rate-setting meeting will be held on 9 May."
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