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Serbia Monetary Policy November 2019

Serbia: National Bank Serbia unexpectedly cuts rates to new record low in November

At its 7 November monetary policy meeting, the executive board of the National Bank of Serbia (NBS) unexpectedly decided to cut the key policy rate from 2.50% to 2.25%, bringing the rate to a new record low in the inflation targeting regime and total monetary policy easing to 75 basis points this year. Markets had anticipated the NBS to hold fire in November.

The decision was largely guided by the sustained downward trend in inflation, which remained below the Bank’s tolerance band of 3.0% plus or minus 1.5 percentage points in September (1.1%). Moreover, the NBS expects inflation to remain within the lower half of the target range both this year and next, before gradually returning to the midpoint over the medium-term. The Bank’s decision was also influenced by external factors, mainly the global trade slowdown, monetary policy loosening by major central banks, particularly the ECB and the Fed, and low inflation in the Euro area. Nevertheless, the NBS highlighted the continued resilience of the economy: Available data suggests GDP growth will be better than initially expected in Q3 thanks to stronger investment and a recovery in manufacturing following the overhaul of the oil and chemical industry sectors.

The Bank’s communiqué was devoid of any forward guidance. Most notably, however, the Bank removed its previous statement that “caution in the monetary policy pursuit is still warranted” and it seems likely that the Bank will return to the sidelines and wait to see the pass-through effects of its three rate cuts. On the one hand, a strengthening economy gives little justification for further rate cuts down the road; on the other hand, subdued inflationary pressures provide space for monetary stimulus, while the Bank could choose to focus more on external risk in its decisions. The next quarterly inflation report will be released on 14 November, which will include the NBS’ projections for economic growth and inflation and should provide some insight on the monetary policy outlook.

Commenting on the meeting, Jessica Murray, an economist at JPMorgan, noted:

“The bank’s decision to stay on hold last month signalled to us that uncertainty about the global environment and global policy action (that is, the risk of reversal in capital flows from EM) outweighed the domestic story. Yet, rhetoric of the November statement suggests that the bank has become somewhat less troubled with global uncertainty. […] Our base case, then, is for the NBS to stay on hold at 2.25%, as external issues could easily again become concerning, plus, economic activity looks to have outperformed expectations in 3Q.”

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

“With the NBS clearly focused on short-term conditions, today’s cut might be followed by another cut in December, if EUR-RSD remains stable. Further cuts in 2020 could be possible if a global economic slowdown leads central banks to ease more than currently expected, and as long as capital flows do not push up EUR-RSD.”

The next monetary policy meeting is scheduled for 12 December.

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