The Bank of Serbia (NBS), which has cut its rate by 150 basis points this year, added that fiscal tightening foreseen in the 2015 budget should help ease the negative impact from international uncertainties - including geopolitical risks and changes in policy by major central banks - by having a positive effect on the country's risk premium and thus help keep inflation low and stable.
Serbia's inflation rate eased to 1.8 percent in October from 2.1 percent, below the central bank's target of 4.0 percent, plus/minus 1.5 percentage points.
Serbia's Gross Domestic Product contracted by 3.6 percent in the third quarter from the same 2013 quarter, up from a decline of 1.3 percent in second quarter. The International Monetary Fund said last month that Serbia's economy is expected to shrink this year, partly due to floods in May, weak domestic demand and troubled corporate balance sheets.
The government's general deficit is projected to rise to about 8 percent of GDP this year but the IMF said the government's new economic program, including fiscal consolidation and structural reforms, should halt the rise in debt and put it on a downward trajectory by 2017.
The NBS also eased the foreign exchange reserve requirements on banks by 100 basis points to 27 percent on funding for up to two years to help banks increase credit to Serbian businesses.
The National Bank of Serbia issued the following policy statement:
"At its meeting today, the NBS Executive Board decided to keep the key policy rate at 8%.
In making the decision, the Executive Board was guided by the fact that y-o-y inflation is still moving below the lower bound of the target tolerance band. However, while dented aggregate demand and low inflation in the international environment generate disinflationary pressures in the long run, the falling prices of primary agricultural commodities and unadjusted administered prices have a temporary disinflationary effect and have made the strongest influence on the movement of inflation below the lower bound of the target (4±1.5%).
The Executive Board judges that the monetary policy measures undertaken so far, gradual waning of disinflationary effects of low food production costs, and the expected administered price adjustment will contribute to inflation’s return within the target band by mid-2015.
Furthermore, the Executive Board is aware of persistent uncertainties coming from the international environment associated with the impact of geopolitical factors, monetary policy moves of the world’s leading economies, as well as the pace of economic recovery of our major trade partners.
The Executive Board expects that fiscal consolidation envisaged by the 2015 budget will mitigate the negative impact of risks emanating from the international environment and have a positive bearing on the country’s risk premium, which will all contribute to keeping inflation low and stable.
The next rate-setting meeting of the Executive Board is scheduled for 15 January 2015."