Thursday, April 12, 2018

Serbia cuts rate 25 bps, inflation falls more than expected

      Serbia's central bank lowered its key policy rate by another 25 basis points to 3.0 percent to boost economic activity on faster-than-expected fall in inflation in the last three months.
       It is the second consecutive rate cut by the National Bank of Serbia (NBS), which has now cut it by 50 basis points this year. The NBS has been in an monetary policy easing cycle since May 2013 and has cut the rate by a total of 875 basis points since then.
       The NBS left its deposit rate unchanged at 1.75 percent, narrowing the interest rate corridor to 1.25 percentage points from 1.50 percent.
         "The expected movement in inflation and its underlying factors going forward allow for further monetary policy easing," NBS said, noting headline inflation in March eased to 1.4 percent from 1.5 percent in February and 1.9 percent in January.
        Low inflationary pressures were also confirmed by core inflation, which fell to 0.8 percent, NBS said, adding inflation is projected to remain around the current level in coming months before coming closer to its midpoint in 2019, boosted by stronger domestic demand.
       NBS targets inflation of 3.0 percent, plus/minus 1.5 percentage points.
       Serbia's Gross Domestic Product grew by an annual rate of 2.5 percent in the fourth quarter of last year, up from 2.1 percent in the third quarter.
       Serbia's dinar has been rising steadily against the euro in the last 12 months, with the NBS intervening on many occasions to curb its rise.
       Today the dinar was trading at 118.14 to the euro, up 0.5 percent this year and up 4.1 percent since the start of 2017.

       The National Bank of Serbia issued the following statement:

"At its meeting today, the NBS Executive Board decided to trim the key policy rate to 3%. At the same time, the decision was made to narrow the interest rate corridor from ±1.5 to ±1.25 percentage points, meaning that the deposit facility rate remains unchanged.
In making such a decision, the Executive Board assessed that the expected movement in inflation and its underlying factors going forward allow for further monetary policy easing. 
The slowdown in inflation in the past three months was stronger than expected. In March, year-on-year inflation equalled 1.4%, indicating a further reduction in inflationary pressures. That inflationary pressures are low is also confirmed by movements in core inflation, which decelerated to 0.8% year-on-year in March, its lowest level since inflation has been measured by the consumer price index. As highlighted by the Executive Board, under the projection, inflation will stay around the current level in the coming months. It is expected to come closer to the midpoint during 2019, also on account of growth in domestic demand. Inflationary pressures remain subdued as also indicated by anchored inflation expectations of the financial and corporate sectors, which expect even two-year ahead inflation to be at the target midpoint (3.0%). By lowering the key policy rate amid low inflationary pressures, the NBS will provide additional support to credit activity and economic growth.
The Executive Board pointed out that caution in the conduct of monetary policy is still mandated by the developments in the international financial market and movements of global primary commodity prices. Uncertainty in the international financial market still prevails on account of the monetary policies of leading central banks, the Fed and the ECB, as well as the relationship between their currencies. Even though the movement of global primary commodity prices is still volatile, they are not expected to rise significantly in the coming period. The Executive Board pointed out that the resilience of the Serbian economy to potential adverse effects from the international environment has increased, owing to the strengthening of domestic macroeconomic fundamentals and a more favourable outlook for the period ahead.

The next rate-setting meeting will be held on 10 May 2018."


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