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Serbia Monetary Policy August 2019

Serbia: NBS axes key policy rate again in August

At its 8 August monetary policy meeting, the executive board of the National Bank of Serbia (NBS) voted to slash the key policy rate to 2.50% from 2.75%, a new record-low under the inflation targeting. The Bank’s decision, which caught markets by surprise, was primarily guided by the Bank’s latest inflation report, which sees subdued inflationary pressures ahead, and the dovish shift in key central banks such as the U.S. Federal Reserve and the ECB.

As outlined in the Bank’s August inflation report, the NBS projects weaker price pressures ahead. The NBS now expects inflation, which ticked up to 1.6% in July, to remain within the lower half of the Bank’s tolerance band of 3.0% plus or minus 1.5 percentage points for the remainder of this year and into next year. Moreover, the dinar has appreciated notably against the euro this year, requiring the Bank to intervene in foreign exchange markets to keep the currency stable.

Weak inflation, paired with the Fed’s rate cut and expectations of monetary stimulus by the ECB, provided room for the NBS to loosen its own stance to support the economy and stimulate credit growth. Monetary easing by key economies would likely improve financial conditions for emerging markets such as Serbia, by boosting capital inflows. While the flash GDP estimate for the second quarter was cancelled by the Statistical Institute, the economy likely fared well in the quarter, powered by a strong domestic economy, and the Bank maintained its full-year growth projection for 2019 at 3.5% in August. That said, weakness persists in the external sector, partly due to the tariffs imposed by Kosovo, which have also weighed on industrial production.

The Bank’s communiqué was void of forward guidance as to whether further monetary loosening is in the cards. The Bank noted the greatest risks to the outlook stem from the external environment, suggesting that stronger-than-expected easing by major central banks and/or a further deterioration in global trade relations could see the Bank deliver additional rate cuts to cushion the effects on the Serbian economy.

The next monetary policy meeting will be held on 12 September.

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