Serbia's central bank held its policy rate steady at 9.50 percent, repeating that it expects inflation to return to the bank's tolerance range in the coming period and the bank is "determined to gear monetary policy at stabilizing inflation at that level on a long-term basis."
"Though inflationary pressures and expectations have both lessened significantly, the Executive Board accentuated the need for a cautious monetary policy considering the risks emanating from movements in international financial markets, and in particular the Fed's decision on tapering the quantitative easing program," the Bank of Serbia said.
On Tuesday, the central bank issued a statement saying a weakening of the dinar currency over the last three days did not indicate any "durable disturbances in the FX market" but rather an expected response by the currency to a seasonally higher demand for foreign exchange by local companies and the Fed's decision to start reducing its asset purchases from January.
Last year the Serbian central bank cut its rate by a net 175 basis points as inflation slowed from 12.8 percent in January to a year-low of 1.6 percent in November. In December inflation rose to 2.2 percent but remains below the central bank's tolerance range of 2.5-5.5 percent around a 4.0 percent midpoint.
The central bank said on Monday that the current undershooting is largely due to a 2.5 percent decline in food prices in 2013, shown by the fact that core inflation - which excludes food, energy, alcohol and cigarettes - was 4.2 percent in December. The main contributor to inflation last year was administered prices, which rose 10.4 percent.
Inflation is expected to rise moderately in coming months toward the bank's target, driven by higher administered prices and a one-off impact of a rise in value-added-tax on some goods in January. Lower food production costs and weak demand will continue to have a disinflationary effect.
In today's statement, the central bank said a consistent implementation of fiscal measures, together with the weak inflationary pressure, will help increase the country's resilience to external risks and aid the economic recovery.
Serbia's dinar currency was resilient to pressure on emerging market currencies in the middle of 2013 after global investors started to withdraw funds in anticipation of the U.S. Federal Reserve's reduction in its asset purchases on improving growth prospects. Nevertheless, the central bank often expressed its concern over the consequences of a sudden capital outflow and was cautious in cutting rates.
The dinar appreciated by 2.5 percent to the U.S. dollar in 2013, ending the year at 83.0 to the dollar, up from 85.13 at the end of 2012. But in the first few days of January, the dinar fell, triggering the central bank's statement on Tuesday. Today the dinar was trading around 84.90, down 2.2 percent.
The central bank also repeated yesterday that it would intervene, both on the sale and purchase side of the foreign exchange markets when necessary to mitigate excessive volatility and ensure stability.
Serbia's economy has been improving in recent months following two years of recession with Gross Domestic Product expanding by 1.4 percent in the third quarter from the second quarter for annual growth of 3.70 percent.
The central bank forecasts growth of 1.5 percent this year and growth of 2 percent in 2013.