The National Bank of Serbia (NBS) has cut its rate six times this year by a total of 350 basis points in response to falling inflation and a stable dinar exchange rate that has been underpinned by an improvement in government finances.
The central bank has also frequently acknowledged that it has been able to cut rates in light of accommodative monetary policy in advanced economies, such as the U.S. and in the euro zone, that has kept global liquidity high and thus the flow of capital to emerging markets, including Serbia.
But the central bank has now turned more cautious, saying the international economic environment has "persistent external risks."
The U.S. Federal Reserve is expected to raise its federal funds rate in December, its first change in rates since December 2008.
Serbia's inflation rate was stable at 1.4 percent in October and September and the central bank said last month that it expected inflation to move back into its tolerance range of 2.5 to 5.5 percent in early 2016 and return to the midpoint target of 4.0 percent from mid-2016.
The executive board of the NBS approved its November inflation report today and will present it on Nov. 19.
The National Bank of Serbia issued the following statement:
"In its meeting today, the NBS Executive Board decided to keep the key policy rate unchanged at 4.5 percent.
This decision was made in consideration of the expected effects of past key policy rate cuts and gradual trimming of the FX reserve requirement ratio on inflation movements in the period ahead in an environment of persistent external risks. Uncertainties over the coming period mostly relate to divergent monetary policies of leading world economies. An increase in the Fed funds rate could have a negative impact on liquidity in the international financial market, hindering capital flows to emerging markets. However, the Executive Board assesses that the resilience of the Serbian economy to the above external risks is bolstered by the effects of fiscal consolidation measures, better-than-anticipated growth prospects, reduced external imbalance and consistent implementation of the arrangement with the International Monetary Fund.
After reviewing current monetary and macroeconomic developments and projections, the Executive Board stated that inflationary pressures remain subdued, reflecting chiefly low inflation abroad, low prices of primary commodities in the international markets, relative stability of the exchange rate, positive effects of fiscal consolidation and a further fall in inflation expectations. Y-o-y inflation is expected to temporarily return within the target tolerance band in early 2016 as a result of the drop-out from calculation of last year’s decrease in prices of petroleum products and cigarettes. A more durable stabilisation of inflation within the target band is expected from mid-2016.
At its meeting today, the Executive Board also adopted the November Inflation Report that will be presented to the public on Thursday, 19 November.
The next rate-setting meeting of the Executive Board will be held on 10 December 2015."