The National Bank of Serbia (NBS), which cut its rate by 350 basis points last year, added that the "degree of monetary policy accommodation will depend mainly on the assessment of the inflationary effect of developments in international commodity and financial markets."
Serbia's inflation rate rose to 1.5 percent in December, below the central bank's midpoint target of 4.0 percent, but it expects inflation to gradually rise and return to its tolerance range of 2.5 to 5.5 percent in the second half of this year despite low commodity prices, low international prices, restrictive fiscal policy and "persistently muted aggregate demand."
Serbia's dinar was relatively stable against the euro last year though it was volatile in December due to low market liquidity, leading to intervention by the NBS, according to press reports.
On Dec. 29 the central bank was reported by dealers to have purchased of euros against the dinar and last week dealers said the central bank had been selling euros with the dinar trading around 122 to the euro, according to dealers.
The dinar was trading at 122.16 to the euro today, down 1.8 percent since the start of 2015.
The National Bank of Serbia issued the following statement:
"At its meeting today, the NBS Executive Board decided to keep the key policy rate unchanged at 4.5%.
The decision was made in consideration of the prevailing uncertainties in the international environment. With the start of normalization of the Fed’s monetary policy, uncertainties are now mostly associated with the pace and scale of policy rate increases during 2016, which will have a major impact on commodity and financial markets and capital flows towards emerging economies. Even so, these effects will be moderated by the ECB’s further monetary easing begun last December and the extension of non-standard measures until March 2017.
Against a backdrop of strong geopolitical tensions, uncertainties in the international environment are further accentuated by turbulences in the financial market and Chinese growth slowdown.
However, progress in fiscal consolidation, sustainability of public finances, improvement in the business and investment environment and the narrowing of external imbalances have greatly contributed to increasing domestic economy’s resilience to risks in the international environment.
The Executive Board assessed that inflationary pressures will remain subdued in the period ahead. Y-o-y inflation is below the NBS target. Both one- and two-year ahead inflation expectations of financial and corporate sectors are still below the midpoint of 4%. Low prices of primary commodities, notably oil, low inflation in the international environment, restrictive fiscal policy at home and the persistently muted aggregate demand (which may also be affected by the slowdown in global growth) are conducive to low inflation. Despite the risks, we expect inflation to gradually rise and return within the target tolerance band in the second half of the year, aided also by past monetary policy easing.
Given that uncertainties surrounding movements in inflation emanate primarily from the international environment, the degree of monetary policy accommodation will depend mainly on the assessment of the inflationary effect of developments in international commodity and financial markets.
The next rate-setting meeting of the Executive Board will be held on 11 February 2016."