Serbia's central bank maintained its key policy rate at 11.0 percent due to the higher risk aversion of international investors and added that weakening inflationary pressures are expected to accelerate and inflation should return to the bank's target range by October.
The National Bank of Serbia (NBS), which last cut its rate in June, said the decline in inflation is largely due to its policy measures and a stabilisation in the food market. Last month the NBS also said it expected inflation to return to its range of 4.5 percent, plus/minus 1.56 percentage points, by October.
Serbia's inflation rate has been stable at 9.8 percent in June and May, down from a recent high of 12.9 percent in October last year.
The central bank said the economic recovery that started late last year is continuing and it estimates that Serbia's economy will expand by 2 percent this year, led by rising exports. In the first quarter of this year the economy grew by 1.9 percent from the fourth for annual growth of 0.7 percent, down from 2.1 percent in the fourth quarter.
But the bank's executive board also said additional fiscal consolidation and structural reforms will help ease inflationary pressures further, along with external imbalances, boosting the risk perception by international investors of Serbia.
"However, given the higher risk aversion of international investors, prompted by the Fed's hint at downsizing of the quantitative easing programme, which spurred a rise in the country's risk premium and depreciation pressures in Serbia and almost all countries in the region, the Executive Board decided to keep the policy rate unchanged," the NBS said.
Like other emerging markets, Serbia was hit by an outflow of funds in May and the central bank intervened in foreign exchange markets several times in June to slow the decline in the dinar. Since the beginning of July, the dinar has stabilized and is down only 1.5 percent agains the euro this year, trading around 113.98 to the euro today.