Serbia holds rate, offers liquidity as economy improving

     Serbia's' central bank left its key interest rate unchanged but said it will take proactive and preemptive measures in light of new risks to health from COVID-19 by offering banks the possibility of additional cheap liquidity in an environment of a faster-than-expected economic recovery from the crises.

     The National Bank of Serbia (NBS left its key policy rate at 1.25 percent, unchanged since June when it cut it for the third time in 2020, increasing the cumulative rate cuts to 100 basis points.

     In making its decision, the bank's executive board said it was guided primarily by the achieved and expected effects of the past monetary and fiscal measures to lessen the impact of the pandemic and it expects those measure to continue to have a positive impact on financing conditions.

     NBS has been in a monetary easing cycle since May 2013, cutting its rate 27 times and by a total of 10 percentage points.

     But as throughout Europe and the U.S., Serbia is seeing a rise in new cases of COVID-19 and NBS said it wanted to maintain a sufficiently high level of available and cheap liquidity in the banking sector, and in turn, the corporate sector to ensure a continuation of the stimulus.

     Although the banking sector still has excess dinar liquidity, NBS said the provision of additional assets should make financing conditions even more favorable by maintaining low interest rates and encouraging banks' lending.

     Banks will be able to use two dinar liquidity lines: foreign exchange purchase swaps and securities purchase repos. Swap auctions will be held on Mondays - the first one on Nov. 16 - and repo auctions on Thursdays - starting Nov. 19 - with banks given the options of obtaining liquidity for a 3-month period under favourable conditions using FX or dinar securities as collateral.

     The bank's preemptive measures comes as Serbia's economy has bounced back faster than expected in the third quarter, with NBS attributing this to a faster-than-anticipated recovery in investment, accelerated implementation of infrastructure projects and the more favorable financing conditions.

     Serbia's economy shrunk 9.2 percent in the second quarter from the first quarter, which also shrank 0.5 percent, and the central bank said its November inflation forecast confirmed its expectation that gross domestic product this year will only shrink 1.0 percent, up from its earlier forecast of 1.5 percent.

    "Led by rising domestic and external demand, the recovery from the crises should be more than full next year, with a GDP growth rate of around 6%," NBS added.

     Inflation in Serbia has remained low during the pandemic and NBS forecast it would continue to move in the lower half of its target band and gradually trend closer to the 3.0 percent midpoints in 2022 as demand recovers.

    "Such movements indicate that there is room for additional monetary policy easing in the period ahead," the central bank said, adding it was ready to respond to any excessive negative effects from the pandemic to changes in the domestic or international environment.

Armenia holds rate as inflation eases, seen stabilizing

     Armenia's central bank held its benchmark refinancing rate steady at 10.50 percent, citing a slowdown in inflation in May to 5.1 percent from 7.75 percent in April and expectations of further impact on inflation from external factors in coming months.
     The Central Bank of Armenia (CBA), which has raised its rate by 375 basis points since December following a sudden plunge in the dram's exchange rate, said it expects inflation to stabilize around its target next year following the impact of the rise in electricity tariffs in August.
    CBA targets inflation of 4.0 percent, plus/minus 1.5 percentage points.
    The dram currency was dragged down in late November by Russia's economic crises, its main trading partner, which led to a sharp fall in remittances.
     Following three rate hikes, the dram stabilized and was trading at 473.1 to the U.S. dollar today, up 0.4 percent since the beginning of the year.
    The central bank added that macroeconomic stability achieved early this year was continuing to contribute to the recovery of economic activity, with growth of 2.7 percent in the activity index in the January-May period due to progress in agriculture and industry.
    Last month the central bank revised upward its forecast for economic growth this year for Gross Domestic Product to expand by 1.6-2.6 percent, up from its earlier forecast of 0.4-2.0 percent.
    In the first quarter of this year, Armenia's GDP grew by an annual rate of 2.2 percent, below the fourth quarter's 2.6 percent.
   
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