National Bank of Serbia keeps key policy rate at 4.5%
With the start of normalization of the Fed’s monetary policy, uncertainties are now mostly associated with the pace and scale of policy rate increases during 2016, which will have a major impact on commodity and financial markets and capital flows towards emerging economies.
Even so, these effects will be moderated by the ECB’s further monetary easing begun last December and the extension of non-standard measures until March 2017. Against a backdrop of strong geopolitical tensions, uncertainties in the international environment are further accentuated by turbulences in the financial market and Chinese growth slowdown.
However, progress in fiscal consolidation, sustainability of public finances, improvement in the business and investment environment and the narrowing of external imbalances have greatly contributed to increasing domestic economy’s resilience to risks in the international environment.
The Executive Board assessed that inflationary pressures will remain subdued in the period ahead. Y-o-y inflation is below the NBS target. Both one- and two-year ahead inflation expectations of financial and corporate sectors are still below the midpoint of 4%.
Low prices of primary commodities, notably oil, low inflation in the international environment, restrictive fiscal policy at home and the persistently muted aggregate demand, which may also be affected by the slowdown in global growth, are conducive to low inflation. Despite the risks, we expect inflation to gradually rise and return within the target tolerance band in the second half of the year, aided also by past monetary policy easing.
Given that uncertainties surrounding movements in inflation emanate primarily from the international environment, the degree of monetary policy accommodation will depend mainly on the assessment of the inflationary effect of developments in international commodity and financial markets.
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