Thursday, January 15, 2015

Serbia holds rate, still sees inflation in target mid-2015

    Serbia's central bank maintained its key policy rate at 8.0 percent, confirming that it still expects inflation return to its target range by the middle of this year due to a gradual weakening of the disinflationary impact of lower food production costs and expected changes in administered prices.
    The Bank of Serbia (NBS), which cut its rate by 150 basis points in 2014, acknowledged that inflation was below the lower bound its tolerance band - it targets inflation at a midpoint of 4.0 percent with a lower bound of 2.5 and an upper bound of 5.5 percent - but attributed this to temporary factors, such as low agricultural commodities, the sharp fall in oil and low growth in administered prices.
    While Serbia's headline inflation rate fell to 1.7 percent in December from 2.4 percent, the NBS said core inflation was 2.3 percent in December, "attesting to the short-term disinflationary effect of said factors."
    Once the temporary factors dissipate, "depressed domestic demand and low euro area inflation" will help keep Serbia's inflation rate low and stable, the bank added.
    To free up further credit by banks to the corporate sector, the central bank also cut its requirement on banks'  foreign exchange reserves by 100 basis points to 26 percent on liabilities up to 2 years and to 19 percent on liabilities with maturity over 2 years.
    In addition, the NBS is allowing banks to boost the dinar share of foreign exchange reserves to 38 percent from 36 percent, and to 30 percent from 28 percent, depending on maturity.


   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 percent. 
In making this decision, the Executive Board was guided by the fact that y-o-y inflation continues to move below the lower bound of the target tolerance band, reflecting largely the factors with a temporary disinflationary effect, such as low prices of primary agricultural commodities, a sharp fall in oil prices and weak administered price growth. Y-o-y core inflation, which measured 2.3% last December, approached the lower bound of the target tolerance band, attesting to the short-term disinflationary effect of the said factors.     
In the Executive Board’s best collective judgement, inflation will return within the target tolerance band (4±1.5%) around mid-year as a result of past monetary policy measures, gradual weakening of the disinflationary effect of low food production costs and the anticipated adjustment of administered prices. Depressed domestic demand and low euro area inflation will help keep domestic inflation low and stable in the medium run. 
The Executive Board stated that the risks from the international environment, which have heightened investor risk aversion to emerging markets, persist and that international capital flows in the coming period will depend on the character of monetary policies pursued by the leading central banks, notably the Fed and the ECB, as well as on geopolitical events. 
The Executive Board concurred that the implementation of fiscal consolidation measures and structural reforms in Serbia, on the other hand, will contribute to the reduction of internal and external imbalances and lesser sensitivity to developments in the international environment, as well as to maintaining the country’s macroeconomic stability. 
The next rate-setting meeting will be held on 12 February."

    www.CentralBankNews.info



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