Thursday, February 11, 2016

Serbia cuts rate 25 bps on low inflation, China slackening

    Serbia's central bank cut its key policy rate by 25 basis points to 4.25 percent, surprising economists who had expected rates to remain steady, saying that inflationary pressures are expected to remain low due to domestic factors along with weak cost and demand pressures internationally.
    The National Bank of Serbia (NBS), which cut its rate by 350 basis points in 2015, did not issue a specific guidance for its policy stance in the near future in contrast to January's statement when it said  the degree of monetary policy accommodation would hinge on the inflationary impact from international commodity and financial markets.
    Today it said that it would use all available instruments to keep inflation low and stable along with preserving financial stability and a "relatively stable exchange rate" while fiscal consolidation and narrower external imbalances would be "of great assistance" in moderating any external shocks.
    Since January financial markets have been extremely volatile and the NBS said the "increasingly certain" slackening of China's economy could have negative effects on global demand and growth, especially to the extent that it affects the euro area, Serbia's main trading partner.
    "The continuing decline global prices of oil and other primary commodities and the subdued prospects for their growth in the period ahead also works towards easing inflationary pressures," the central bank said, adding that it is even possible that the U.S. Federal Reserve's policy normalization will be "slower than expected earlier."
    The central bank also noted the European Central Bank's easing in December and the "possibility of further accommodation in March."
    Serbia's inflation rate rose to 1.5 percent in December from 1.3 percent in November and the central bank expects it to rise moderately from mid-2016 and return to its target band of late this year or early 2017.
    The central bank targets inflation at a midpoint of 4.0 percent, within a range of 2.5 to 5.5 percent.
    At its meeting today, the central bank's executive board narrowed the corridor of its interest rates to plus/minus 1.75 percentage points from plus/minus 2.0 points relative to its key rate to help stabilize money market rages, reduce the spread between effective rates and the policy rate and thus strengthen the transmission channel of its policy.

    The National Bank of Serbia issued the following statement:

"The NBS Executive Board decided in its meeting today to cut the key policy rate by 0.25 pp, to 4.25%.  
The Executive Board also adopted amendments to the Decision on Interest Rates Applied by the National Bank of Serbia, narrowing the interest rate corridor from ± 2.0% to ±1.75% relative to the key policy rate. The amendments were put through in an effort to contribute to further stabilisation of interest rates in the interbank money market, gradual reduction of the spread between the effective rate and the key policy rate, and strengthening of the interest rate transmission channel. 
The Executive Board's decision was taken in consideration of the expected continuation of low inflationary pressures on account of the majority of domestic factors, as well as of weaker cost-push and demand-side pressures stemming from the international environment.
The slackening of some emerging markets, notably China, which seems increasingly certain, could have negative effects on global demand and economic growth, especially as regards the pace of growth of Serbia’s key trade partner – the euro area. The continuing decline in global prices of oil and other primary commodities and the subdued prospects for their growth in the period ahead also work towards easing inflationary pressures. In such circumstances it is even possible that the pace of normalisation of the Fed’s monetary policy will be slower than expected earlier. Besides, the ECB eased its monetary policy again in December and announced the possibility of further accommodation in March. 
The Executive Board assessed that year-on-year inflation will rise moderately from the middle of the year and return within the target tolerance band late this or early next year.

The National Bank of Serbia will continue to  monitor closely the developments in the international environment and use all available instruments, to keep inflation low and stable, as this, together with preserving financial stability and a relatively stable exchange rate, is a precondition to accelerated but sustainable economic growth. Moreover, progress in fiscal consolidation and ensuring sustainability of public finances, improvement in the business and investment environment, and the narrowing of external imbalances will be of great assistance in moderating the effect of any external shocks.

The National Bank of Serbia expects that the continued monetary easing will lead to a further decline in lending rates and sustained recovery in lending, which will contribute to higher investment.
The Executive Board also adopted the February Inflation Report, which will be presented to the public on Friday, 19 February.
The next rate-setting meeting will be held on 17 March 2016."


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