Serbia's central bank left its key policy rate at 4.0 percent, as expected by financial markets, saying inflation is expected to return to its target range by mid-2017, helped by past rate cuts, higher domestic demand and a recovery of oil prices and inflation abroad.
The National Bank of Serbia (NBS), which has cut its rate by 50 basis points this year, added that the disinflationary impact of a further drop in agricultural commodities and low food prices from a good harvest “will be felt for some time to come.”
Serbia's inflation rate eased to a lower-than-expected 0.6 percent in September from 1.2 percent in August as the cost of food dropped along with other items.
In its August inflation report, the NBS projected that inflation would slowly rise in coming months and enter its target range of 2.5 percent to 5.5 percent early next year. The midpoint target is 4.0 percent.
The NBS said it was still cautious in its monetary policy due to the uncertainty in international financial markets regarding future policy by both the U.S. Federal Reserve and the European Central Bank (ECB) and its impact on global capital flows.
Serbia's dinar has been slowly depreciating against the euro since May 2013 and was trading at 123.1 to the euro today, down 1.4 percent this year.
On Wednesday dealers reported that the central bank had purchased an unspecified amount of euros to keep the dinar from rising against the euro. Dealers reported that the NBS had bought euros against dinars for the first time in a month when it was trading between 123.05 and 123.25.
The National Bank of Serbia issued the following statement:
The Executive Board advised caution in the conduct of monetary policy bearing in mind uncertainty in the international financial markets regarding future FED and ECB measures and their potential impact on global capital flows. However, the successful implementation of fiscal consolidation and structural reforms, as well as the reduction of external imbalances, have strengthened the resilience of the domestic economy to potential adverse influences from the international environment. This is also confirmed by a sizeable drop in the country’s risk premium to its nine-year low.