Serbia Watch: Key rate flat but cuts around the corner
The Executive Board of the National Bank of Serbia (NBS) decided to keep the key rate at 6.5%, for the ninth month in a row. Local price developments support a scenario of a rate cut already in Q2 but upside risks for US rates may affect the timing of first cuts by NBS.
The Executive Board of the National Bank of Serbia (NBS) voted for no change of the benchmark rate for the ninth month in a row. The decision was supported by declining but still high global inflation, and NBS' expectations that inflation will return to the target in May despite uncertainties concerning the energy and commodity prices in the global markets. The earlier tightening via key rate hikes and an increase in the mandatory reserve rate on bank deposits, proved to be an effective tool of the monetary policy transmission.
NBS has taken into account the slowdown in global inflation and assesses the risks as balanced. Though many central banks are expecting inflation will return to the target range in H2, cautiousness is still needed in the euro-zone and the US, especially concerning the core inflation developments, where growth is still driven by higher wages. Thus, it is obvious that the European Central Bank (ECB) and Federal Reserve (Fed) remain cautious about when the rate cut cycles should start. EB of the NBS confirmed also that monetary policy needs to be cautious due to the rise in the oil prices on the global markets amidst the decision of the OPEC+ countries to limit supply during the second quarter.
The Executive Board of the NBS expects further inflation deceleration and its return in the inflation target (3% +/-1.5 pp) earlier (May) than expected previously (mid-year). It then expects it to fall to around 3% by the end of 2024, staying at that level in the mid-term. This trend will be supported by the restrictive monetary policy, the slowdown in imported inflation, low external demand and a further fall in inflation expectations. FI inflation expectations for the one-year horizon have already entered the inflation target.
Regarding the GDP growth, NBS confirmed its estimates for acceleration between 3%-4% in 2024, supported by infrastructural investments (traffic, utility and energy), moderate personal consumption growth and private investments.
Though domestic inflation data supports a looming rate cut, the recent US inflation data and market rumours that the Fed might postpone the first rate cut to Q3 (which we also see as increasingly likely), might also influence the local central bank decision. For the time being, we keep our scenario on first-rate cuts in late Q2 at a very gradual pace (-25bp), though will monitor the Fed and ECB statements and respond with new forecasts if needed.
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Ljiljana GRUBIC
Serbia Ljiljana joined Raiffeisen in 2001 as specialist for banking credit risk analyses, later enlarging its focus to municipalities and insurance credit risk analyses. In 2007 she moved to research team, becoming equity research analysts and afterwards in 2010 expanding its analytical skills to macro-economic analyses, becoming Economic Research Specialist. Her long experience in macro-economic analyses and forecasts was lauded by FocusEconomics awards, three years in a row, and her promotion to Chief Economist role. She is a speaker at corporate/investors conferences and roadshows organized within the Raiffeisen bank. In her spare time, she enjoys travelling and painting.
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