Serbia’s central bank left its key policy rate steady, as expected, but raised its forecast for economic growth and confirmed that it expects inflation to remain within its target tolerance band over the next two years.
The National Bank of Serbia (NBS), which last lowered its rate in April after a 5-year easing cycle, said inflation had returned to its target range in August after accelerating for four months in a row, driven by rising demand and inflation expectations are now anchored around the 3.0 percent target both one and two years ahead.
Serbia’s inflation rate rose to 2.6 percent in August after hitting a 2018 low of 1.1 percent in April. The NBS targets inflation of 3.0 percent within a target range of plus/minus 1.5 percentage points.
The central bank has cut its rate by a total of 50 percent points this year and by a total of 8.75 percentage points since May 2013 when it embarked on a easing cycle.
Boosted by strong demand, investments and exports, Serbia’s economy has “risen vigorously” since the beginning of this year, at the highest rate in the past 10 years, helped by the rate cuts, the central bank said.
The NBS expects growth this year to exceed 4.0 percent, up from its September forecast of around 4 percent, with a significant contribution from a rise in foreign direct investment that will ensure “vibrant growth in manufacturing exports going forward,” NBS said.
Serbia’s economy expanded by a higher-than-expected 4.8 percent year-on-year in the second quarter of this year, down from 4.9 percent in the first quarter.
Earlier this month the International Monetary Fund raised its 2018 growth forecast to 4.2 percent and from 3.5 percent and projected 2019 growth of 3.5 percent.
As in recent months, the NBS said global developments are still calling for “caution” in monetary policy due to volatile oil prices and monetary policy tightening by the U.S. Federal Reserve and a wind-down of quantitative easing by the European Central Bank (ECB) that could affect capital flows to emerging markets.
“Besides, growing protectionism in international trade has dampened investor mood and stirred uncertainties in international financial market,” NBS said, adding Serbia’s economy is resilient due to potential negative international effects owning to its macroeconomic fundamentals.
Serbia’s dinar has been under upward pressure in the last year, with the central bank reportedly buying over 1.6 billion euros to hold it down. The NBS operates a managed float exchange rate regime.
The dinar was trading at 118.6 against the euro today, largely unchanged from 118.9 at the start of the year.
The National Bank of Serbia issued the following statement:
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