By CentralBankNews.info
Serbia’s central bank wrong-footed analysts for the second consecutive month by cutting its rate by another 25 basis points to 3.50 percent to provide “additional support to credit activity and economic growth.”
The National Bank of Serbia (NBS) has now cut its rate by 50 basis points this year as it extends an easing cycle that began in May 2013 when the rate was cut from 11.75 percent. Last month’s rate cut was the first since July 2016.
As in September, the NBS said today’s decision to lower the rate further was guided by inflation projections and changes in key inflation factors, such as “subdued dinar import prices and the fact that the country’s risk premium fell to its lowest level on record for Serbia.”
Serbia’s headline inflation rate eased to 2.5 percent in August from 3.2 percent in September while the NBS said core inflation fell to 1.5 percent along with inflation expectations one- and two-year ahead, signaling “the persistently low inflationary pressures.”
In addition, the negative effects of drought on food prices were weaker than expected, the fiscal situation is better than expected, and inflation will slow in early 2018 as certain products that were subject to one-off price hikes, along with high petroleum prices, drop-out of the annual comparison.
Countering these downward pressures on inflation are higher prices of agricultural commodities and a gradual rise in aggregate demand.
However, the central bank said that it still expects inflation to remain within its target tolerance range of 3.0 percent, plus/minus 1.5 percentage points, in the period ahead.
As in last month’s statement, the NBS described international commodity and financial markets as “fraught with uncertainty” from the diverging monetary policies of leading central banks, such as the U.S. Federal Reserve and the European Central Bank that may affect capital flows to emerging economies, such as Serbia.
In August NBS forecast economic growth this year of around 3.0 percent and 3.5 percent for 2018 amid continuing appreciation pressures on the Serbian dinar, this year’s fall in the country’s risk premium, continued export growth and foreign direct investment.
In the second quarter of this year Serbia’s Gross Domestic Product grew by an annual rate of 1.3 percent, up from 1.0 percent in the first quarter, with a weak harvest and lower electricity output leading the International Monetary Fund to lower its 2017 growth estimate to 2.3 percent from a previous 3.0 percent.
Serbia’s dinar firmed steadily this year against the euro until early September, reaching levels not seen since 2014. Today it was trading at 119.42, up 3.0 percent this year.
The NBS has been reported by dealers to have purchased euros around 119 in recent months to stem the dinar’s gains amid strong inflow of investments, remittances and appetite for its government bonds.
The National Bank of Serbia issued the following statement:
Since early 2017, y-o-y inflation has been moving within the target tolerance band, falling to 2.5% in August. Core inflation declined further – to 1.5% y-o-y, as well as both one- and two-year ahead inflation expectations, which signals the persistently low inflationary pressures. In addition, the negative effects of the drought on food prices were weaker than expected. Compared to the August projection, other factors working towards lower inflation are subdued dinar import prices and the fact that the country risk premium fell to its lowest level on record for Serbia. Furthermore, fiscal movements are more favourable than expected, as confirmed by the consolidated surplus of around 2% of GDP in the period of eight months.
By further lowering the key policy rate amid low inflationary pressures, the NBS provides additional support to credit activity and economic growth.
