Central bank keeps key policy rate at 3 percent

Central bank keeps key policy rate at 3 percent

Inflationary pressures remained low even in conditions of strong economic growth. Inflation has been low and stable for five years straight – it measured 1.9 percent y-o-y in November and, according to the Serbian Statistical Office, it averaged 2.0 percent for the whole of 2018. In the coming period, inflation is expected to remain stable within the target tolerance band (3.0±1.5 ), its movements mainly reflecting the steady rise in aggregate demand. Both the financial and corporate sectors expect that the achieved price stability will be maintained in the medium term, as signalled by their inflation expectations anchored around the 3 percent midpoint for both one and two years ahead, the NBS said in a press release.

The Executive Board "judges that caution in monetary policy conduct is still mandated, primarily because of developments in the international environment. "

This year we are likely to see further monetary policy normalization by the world’s leading central banks, the Fed and the ECB, which could affect capital flows to emerging markets. Despite the decline recorded in the closing months of 2018, the global oil price remains an inflation factor that urges caution. Uncertainty in the international financial market also stems from protectionism in international trade and geopolitical risks, which could dampen investor sentiment, the bank added.

Nevertheless, the Executive Board stresses that the resilience of our economy to potential negative effects from the international environment has increased, owing to improved macroeconomic indicators and prospects.

Serbia’s vigorous economic growth continues, owing to preserved macroeconomic, fiscal and financial stability, and the improvement of the overall business and investment climate. Last year’s growth was the highest in the past ten years. According to the preliminary estimate of the Serbian Statistical Office, GDP grew by 4.4 percent y-o-y, with a positive contribution coming from all production and service sectors. Favorable trends in the real sector continued to positively reflect on the labor market as well, which saw a further rise in employment and wages. The net inflow of foreign direct investment reached EUR 3 billion and continues to comfortably cover the current account deficit, reflecting positively on export growth and a reduction in external imbalances in the medium run.

The next rate-setting meeting will be held on February 7.