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Serbia Monetary Policy December 2019

Serbia: National Bank Serbia stands pat in December

At its 12 December monetary policy meeting, the executive board of the National Bank of Serbia (NBS) decided to keep the key policy rate at a record low of 2.25%. The decision followed a rate cut at its previous meeting and matched market analysts’ expectations.

The Bank’s decision to hold fire was underpinned by benign inflation, which fluctuated below the Bank’s tolerance band of 3.0% plus or minus 1.5 percentage points for three months before returning to the lower limit in November (1.5%). Moreover, the NBS expects inflation to remain within the lower half of the target range for the first half of 2020, before gradually returning to the midpoint over the medium-term. The Bank also continued to tout the strength of the economy and reduction of external imbalances, while the NBS views the economic outlook as favorable. Strong domestic demand should continue to be fueled by investment growth, while healthy private consumption will be supported by a tightening labor market—with the unemployment rate falling to a record low in Q3—and lower borrowing costs.

In its forward guidance the NBS returned to its cautious stance, commenting that “caution in monetary policy conduct is still mandated”. The Bank expressed concern about risks related to the international environment, particularly uncertain trade policies and the global slowdown. Although it highlighted accommodative monetary stances by leading central banks like the ECB and the U.S. Fed would be supportive to global financial conditions, the Bank also remarked that a deviation in policy direction from market expectations could drive capital outflows in emerging economies such as Serbia.

Mauro Giorgio Marrano, senior CEE economist at UniCredit, argues additional easing is not out of the picture:

“We believe that such cautious monetary policy is justified. The central bank will have to consider potential capital outflows from EM if the global growth outlook worsens. The currencies of countries with C/A deficits that are as large as Serbia’s may be affected in such a situation. […] The NBS might cut its policy rate to 2% next year if EUR-RSD remains stable. Further cuts could be possible if a global economic slowdown leads to central banks’ easing more than currently expected – as long as capital flows do not push EUR-RSD up.”

The next monetary policy meeting is scheduled for 9 January.

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