Serbia’s central bank left its one-week key repo rate unchanged at 11% for a second straight month, despite easing CPI inflation and better economic activity, citing high depreciation pressures on local dinar currency.

The latter were mainly triggered by higher risk aversion of international investors due to signals that the US Fed will lower the volumes of securities purchases and end its quantitative easing program, the bank noted.

The on-hold decision was expected by the market due to both external and domestic factors. In particular, Serbia’s political background remains uncertain after the government’s reshuffle resulted in a change in the ruling coalition while the country struggles to curb its rising budget deficit. In addition, the IMF warned in July against further monetary easing due to rising fiscal risks and exchange-rate pressures.

The NBS expects additional fiscal austerity and structural reforms to boost the country’s risk perception and lower depreciation pressures on the local currency in the near-term.

Serbia’s annual inflation slowed to 9.8% y/y in June from 9.9% the month before reflecting falling food prices. The central bank sees inflation retreating within its target tolerance band of 2.5% to 5.5% by October 2013. However, recent electricity and expected gas prices hike will likely put some upward pressures on prices as housing, water, electricity and gas account for over 16% of the CPI basket.

The recovery of the Serbian economy continued in the second quarter of the year, the NBS also noted. The country’s GDP is projected to expand by 2.0% this year following 1.7% contraction in 2012, on the back of rising exports which will offset subdued domestic demand.

The next rate-setting meeting will be held on September 12, 2013.