Serbian rates cut as central bank insists inflation will drop

By bne IntelliNews May 15, 2013

bne -

Serbia's central bank cut its benchmark interest rate on May 14 for the first time since January 2012, with the strong dinar, weak demand, and the outlook for this year's harvest likely to keep a lid on price growth.

The Narodna Banka Srbije (NBS) cut the one-week repurchase rate by 50 basis points to 11.25%, the lowest since December. The easing came a day after the statistics office reported a "temporary spike" in consumer prices in April. However, the central bank said that it expects price rises to remain subdued, and forecasts a significant drop in inflation by the end of the year.

"The Executive Board took the decision having in mind that inflationary pressures weakened thanks to monetary policy measures, as demonstrated by monthly inflation which stood at an average of 0.25% over the past six months," the bank added in its statement.

"Low aggregate demand, stable movements on the currency market and the drop in the country's risk premiums, coupled with the expected full effects of monetary policy measures undertaken so far, will contribute to a further drop in annual inflation," it said. The next policy meeting is scheduled for June 6.

Serbian inflation remains high, at an annual 11.4 %, but the central bank expects it to drop to a target band of 4.5% plus or minus 1.5 percentage points by the end of the year. The April jump was temporary and almost entirely driven by rising vegetable prices, the NBS said on May 13, with the inflation outlook remaining benign on the new farming season, weak aggregate demand, achieved stability of the foreign-exchange market and a high base effect.

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