By CentralBankNews.info
Serbia’s central bank lowered its policy rate for the third time this year due to a further weakening of inflationary pressures but was upbeat about the outlook for economic growth, saying domestic factors have made up for weak external demand and growth in the third quarter should be higher than expected.
The National Bank of Serbia (NBS) cut its key policy rate by another 25 basis points to 2.25 percent, a new record low since it adopted inflation targeting as its monetary strategy in 2009.
NBS has now cut its rate 75 basis points this year following cuts in April, August and today.
NBS said the cut should lend further support to credit and economic growth, with weak inflation both domestically and internationally the main reason for the rate cut.
However, the easing was also influenced by the slowdown in global economic growth and trade along with the easier monetary policy by leading central banks such as the European Central Bank and the Federal Reserve, NBS said, adding the Fed’s easing should help preserve favorable global financial conditions and and have a positive effect on capital flows to emerging economies.
Headline inflation in Serbia fell further to 1.1 percent in September from 1.3 percent in August due to lower food prices during the agricultural season and lower global oil prices, and subdued inflationary pressures are also indicated by core inflation, which NBS said remains low and stable, as well as inflation expectations.
According to its latest projection, which will be presented Nov. 14, inflation should move around in the lower bound of the target tolerance band of 3.0 percent, plus/minus 1.5 percentage points, until the end of this year and in the first half of 2020.
Inflation should then gradually converge to NBS’s midpoint target in the medium term, reflecting “elevated aggregate demand.”
“The latest economic indicators point to a higher than projected GDP growth in Q3,” NBS said, led by a recovery of manufacturing after completed overhauls and a pickup in construction and services.
Investments are also continuing to growth on the back of infrastructure projects, the business environment has improved and household consumption is continuing to rise due to prolonged labour market trends and the lower cost of borrowing.
“In the year to date, domestic factors managed to compensate for the weaker external demand,” NBS said.
After being hit by drought in 2017, Serbia’s economy grew 4.3 percent in 2018, its fastest pace in 10 years, an its public finances remain in surplus as in the previous two years and the current account deficit is fully covered by foreign direct investment flows for the 5th year in a row.
Gross domestic product grew 2.9 percent in the second quarter year-on-year, up from 2.7 percent in the first quarter and in September NBS forecast 3.5 percent growth this year.
Serbia’s dinar has weakened this year against the U.S. dollar this year but steadily firmed against the euro, which accounts for more than 60 percent of its exports and imports.
The dinar was trading at 106.1 to the U.S. dollar today, down 2.6 percent this year, and at 117.4 against the euro, up 0.6 percent.
The National Bank of Serbia issued the following press release:
“At its meeting today, the NBS Executive Board cut the key policy rate to 2.25%, its new lowest level in the inflation targeting regime, whereby the NBS lends further support to credit and economic growth.
In making the decision, the NBS was guided primarily by the further weakening of inflationary pressures. Similarly to other countries in the region, as the contribution of food prices declined, primarily of vegetables in the new agricultural season, and in light of lower global oil prices, y-o-y inflation in Serbia decelerated in the past several months, reaching 1.1% in September. Subdued inflationary pressures are also indicated by core inflation, which remains low and stable, as well as inflation expectations of financial and corporate sectors being in the lower half of the target band for both one and two years ahead. According to the November central projection, y-o-y inflation will move around the lower bound of the target tolerance band until the end of this year and in the first half of 2020. It is expected to gradually converge to the target midpoint in the medium term, reflecting elevated aggregate demand.
The Executive Board underlines that the resilience of our economy to potential negative effects from the international environment has increased owing to reduced internal and external imbalances, favourable macroeconomic prospects and the record high level of FX reserves. As in the previous two years, public finances are in a surplus, and the current account deficit is fully covered by the net FDI inflow for the fifth year in a row. The latest economic indicators point to a higher than projected GDP growth in Q3, led by the recovery of manufacturing after the completed overhauls in the oil and chemical industry and activation of prior investments, as well as by the pick-up in construction and services. In the year to date, domestic factors managed to compensate for the weaker external demand. Investment continues to grow on the back of further implementation of infrastructure projects, improved business environment and favourable financing conditions. Household consumption also continues to rise on sustainable grounds, owing primarily to the prolonged positive labour market trends and lower cost of borrowing.
In addition to favourable domestic macroeconomic conditions of monetary policy conduct, the Executive Board’s decision to trim the key policy rate further was also influenced by developments in the international environment, notably the slowdown in global trade and growth, and by the monetary policy accommodation by leading central banks. In September the ECB adopted a new monetary stimulus package (the largest in three years) and announced its readiness to go to even greater lengths until a sustainable convergence of inflation to the target is achieved. As expected, in October the Fed trimmed its federal funds rate again. This will help preserve favourable global financial conditions, which should reflect positively on capital flows to emerging countries. In addition, inflationary pressures in the international environment remain low, notably in the euro area, Serbia’s key foreign trade partner.
At today’s meeting, the Executive Board adopted the November Inflation Report, which will be presented to the public on 14 November. On that occasion, we will give a detailed account of monetary policy decisions and underlying macroeconomic trends.
The next rate-setting meeting is scheduled for 12 December.”
