The National Bank of Serbia (NBS), which has cut its rate by 100 basis points this year, said the moderate rise in the country's risk premium and depreciation pressure on its dinar currency "are indicative of reduced appetite of foreign investors."
The NBS confirmed that it still expects inflation to return to its target band of 4.0 percent, plus/minus 1.5 percentage points, by the end of the year and remain within that tolerance range throughout 2015.
Serbia's inflation rate rose to 2.1 percent in September from 1.5 percent in August, with the rise in inflation helped by the low comparison and a gradual waning of disinflationary forces due to low production costs.
The dinar has been depreciating since early May and the central bank has been reported by dealers to have intervened in the foreign exchange market on several occasions in recent months to bolster the currency by selling euros. The NBS has sold more than 1 billion euros this year to stabilize the dinar's exchange rate.
The dinar was trading around 93.90 to the U.S. dollar today, down from 83.30 at the start of the year. Against the euro, the dinar was trading at 119.78 today, down 4.6 percent since the start of the year.
The NBS issued the following statement:
"At its meeting today, the NBS Executive Board voted to keep the key policy rate at 8.5%.
The Executive Board assessed that risks stemming from the domestic and international environment call for further caution in the pursuance of monetary policy. The current geopolitical tensions, including the expected further monetary tightening by the Fed, may adversely affect capital inflows into countries of the region, including Serbia. Moderate growth in the country’s risk premium and depreciation pressures, prevailing in almost all countries of the region over the past several months, are indicative of reduced appetite of foreign investors.
The Executive Board expects that the adoption and consistent implementation of fiscal consolidation measures and structural reforms will affect positively the foreign investors’ perception of Serbia, which may strengthen resilience to the above external risks and positively affect the country’s risk premium in the coming period.
Year-on-year inflation is gradually returning towards the target of 4±1.5%. It equalled 2.1% in September. According to the NBS projection, though the expected adjustment of electricity prices did not take place, inflation will return within the target tolerance band by the year-end, and will move within the band throughout 2015. Inflation’s return within the target band will be aided by the low base and gradual waning of the disinflationary effect owing to low food production costs, as confirmed also by the positive contribution of food prices to year-on-year inflation in September. In contrast, low aggregate demand, underpinned by new fiscal consolidation measures, remains the main disinflationary factor in the medium run. This is borne out also by low core inflation, trending below the target band for the second month in a row.
The next rate-setting meeting will be held on 13 November 2014. "