The National Bank of Serbia (NBS), which has cut its rate by 50 basis points this year, earlier this week lowered its inflation target to 3.0 percent, plus/minus 1.5 percentage points from a previous midpoint of 4.0 percent with the same tolerance range of 1.5 points due to "the substantial improvement in macroeconomic performances and prospects."
The NBS expects inflation to gradually rise in coming months and return to its new target range early next year and remain within that band.
Serbia's inflation rate eased to 0.6 percent in September from 1.2 percent in the previous two months as the disinflationary impact of a fall in the prices of domestic and international agricultural goods continues to be felt.
The exchange rate of Serbia's dinar has remained relatively stable against the euro this year, helped by NBS purchases to prevent any strong rise in the dinar.
The dinar was trading around 123 to the euro today, down 1.3 percent this year.
The central bank's executive board adopted the November inflation report, which will be released on Nov. 21.
In August the central bank forecast Gross Domestic Product growth of 2.5 percent this year and 3.0 percent for 2017. In the second quarter of this year GDP grew by an annual rate of 2.5 percent.
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 4.0 percent.
In making the decision, the Executive Board took into consideration the inflation projection and the effects of past monetary easing on inflation movements in the period ahead, as well as the fact that the inflation target for 2017 has been revised to 3.0%±1.5 percentage points on account of the substantial improvement in macroeconomic performances and prospects. It is expected that year-on-year inflation will rise gradually in the coming months, return within the new target tolerance band early next year and move within the band thereafter.
Such movements in inflation are anticipated based on the effects of past monetary easing and the recovery of demand at home, coupled with a gradual increase in global oil prices and inflation abroad. On the other hand, the disinflationary impact of a further drop in prices of primary agricultural commodities at home and abroad owing to a good agricultural season, and the resulting low food production costs, will continue to be felt for some time to come.
As highlighted by the Executive Board, monetary policy caution is mandated by uncertainties in the international financial market concerning future measures of the Fed and ECB, and their potential impact on global capital flows. However, successful implementation of fiscal consolidation and structural reforms, including the narrowing of external imbalances, increase the resilience of the domestic economy to potentially adverse effects from the international environment. This is confirmed by the IMF’s positive assessment following their October visit, a falling country risk premium and progress on international competitiveness rankings based on the improvement of the country’s business and investment climate.
The NBS Executive Board adopted the November Inflation Report, which will be presented to the public on Monday, 21 November. On that occasion, monetary policy decisions and the underlying macroeconomic developments will be explained in detail.
The next rate-setting meeting will be held on 8 December."