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Serbia Monetary Policy January 2018

Serbia: NBS keeps key policy rate steady in January for the third consecutive month

At its 11 January monetary policy meeting, the Executive Board of the National Bank of Serbia (NBS) maintained its key policy rate at 3.50% for the third consecutive month. In making its decision—which came in line with market expectations—the NBS specifically took into account inflation expectations and the expected effects of past monetary policy easing.

At earlier meetings in November and December, the NBS had decided to leave its key policy rate unchanged following cuts in both September and October. A stronger dinar helped provide room for those cuts, and while the dinar remains strong, the NBS arguably had little room for further accommodative moves in January due to an increase in public sector compensation in Serbia this year and tighter monetary policy from leading central banks around the world on the horizon.

By keeping its key policy rate at 3.50%, the NBS aimed to support economic growth and ensure that inflation remains within its target range of 3.0% plus or minus 1.5 percentage points. Inflation accelerated from 2.8% in November to 3.0% in December—perfectly at the midpoint of the target range—while core inflation slowed from 1.4% to 1.3%. Inflation is expected to face opposing dynamics early this year in the form of downward pressure from a negative base effect and upward pressure owing to a strong domestic economy. By leaving its key policy rate unchanged, the NBS hoped to minimize any changes that would lead inflation to diverge too far from its target range.

The NBS did not give any concrete indications in its post-meeting communiqué about future intentions. It did note, however, that commodity prices are being monitored carefully—oil prices, for example, have picked up in recent months—as are movements in the monetary policies of leading central banks. But, given that inflation is expected to be slightly below the NBS’s target midpoint in the short term, and that core inflation remains weak as of December, the Executive Board is unlikely to take a particularly hawkish stance at its next monetary policy meeting on 8 February. Nevertheless, several FocusEconomics panelists do expect a key policy rate rise by the end of this year.

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