The Bank of Serbia (NBS), which cut its rate by 150 basis points in 2014, said economic activity was recovering, especially in industry and construction, a sign that the adverse effect of floods from May 2014 was gradually wearing off.
Serbia's Gross Domestic Product contracted by an annual 1.6 percent in the fourth quarter of last year, the third consecutive quarter of shrinking output but below the third quarter's fall of 3.6 percent.
Serbia's inflation rate eased to 1.7 percent in December, below the central bank's lower tolerance band, but the NBS sights was mainly due to temporary factors, such as the unexpectedly small growth in administered prices, the collapse of oil prices and low prices of agricultural products.
The NBS targets inflation at a midpoint of 4.0 percent, with a lower limit of 2.5 percent and an upper limit of 5.5 percent.
On Jan. 27 currency dealers said the central bank had sold euros to support the dinar, which has fallen to lows on investors concern over the exposure of banks to Swiss-franc denominated loans. They said the NBS had intervened when the dinar was trading at 123.8 to the euro.
The dinar has been depreciating since June 2014, with trading volatile since the Swiss National Bank (SNB) scrapped its cap on the franc against the euro. Today the dinar was quoted at 122.2 to the euro, down almost 2 percent since the start of the year.
The National Bank of Serbia issued the following statement:
"At its meeting today, the Executive Board decided to keep the key policy rate at 8 percent.
The Executive Board asserted that y-o-y inflation continues to move below the lower bound of the target tolerance band, which is mainly due to factors with a temporary disinflationary effect such as the unexpectedly small growth in administered prices, the collapse of oil prices and low prices of primary agricultural commodities. Also, the Executive Board acknowledged the on-going geopolitical tensions and volatility in the international commodity and financial markets, which may result in increased investors’ risk aversion, slower capital flows and a more uncertain effect of monetary policy measures of advanced economies, notably those of the ECB, on the economic recovery of our key trade partners.
The Executive Board concluded that the adverse effects of floods are gradually wearing off, as indicated by the recovery of economic activity, notably in the industry and construction sectors.
The factors determining the Board’s decision to keep the key policy rate unchanged will be discussed at the presentation of the February Inflation Report, adopted by the Executive Board at its meeting today.
The next rate-setting meeting will take place on 12 March."