The National Bank of Serbia (NBS) surprised financial markets by cutting its rate by 25 basis points in February but has maintained its rate since then, citing the need for caution in policy decision during the current state of global financial and commodity markets.
While the NBS still notes the "persistent uncertainty" in international markets, it added today that the recent disinflationary pressures in commodity markets is expected to weaken and external risks will be moderated by domestic factors, such as lower internal and external balances.
Inflation is therefore expected to rise, helped by an expected pickup in euro area inflation and the recovery of Serbia's economy.
In its May inflation report, the NBS raised its 2016 growth forecast to between 2.3 percent and 2.5 percent from 1.8 percent projected in February. Inflation was seen slowly rising as of May and then return to the bank's tolerance band of 2.5 percent to 5.5 percent, with a midpoint of 4.0 percent.
Serbia's inflation rate eased to 0.4 percent in April from 0.6 percent in March while its Gross Domestic Product grew by an annual rate of 3.5 percent in the first quarter of this year, up from 1.2 percent in the previous quarter.
Serbia's dinar has been relatively stable since early 2015, helped by central bank interventions to support it. So far this year, the central bank is reported to have sold some 790 million euros.
Today the dinar was trading at 123.2 to the euro, down 1.5 percent this year.
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 4.25%.
Having in mind the current developments, the Board assessed that the present degree of monetary accommodation will help inflation return and stabilise within the target tolerance band early next year.
In deciding to keep the policy rate unchanged, the Board took into consideration persistent uncertainty in the international commodity and financial markets, as well as the expected weakening of disinflationary pressures on account of global primary commodity prices in the coming period. At the same time, the impact of external risks is moderated by domestic factors, primarily the achieved and expected further reduction in internal and external imbalances.
Global prices of oil and primary agricultural commodities continue their recovery. Along with the expected increase in euro area inflation and a faster recovery of the Serbian economy, this should help y-o-y inflation rise gradually in the period ahead. According to the medium-term projection of the National Bank of Serbia, inflation should make its way back within the target tolerance band early next year and continue moving around 3% thereafter.
The next rate-setting meeting will be held on 7 July."