Serbia’s central bank probably will continue with “cautious” interest-rate cuts in the months ahead if inflation slows further, it said in a quarterly inflation report.
Weak domestic demand in the Balkan country, falling crude oil costs and lower base metal prices will help bring the inflation rate down to within the target range in the first quarter of 2012, though the main risks are the global economic and local fiscal situation, the Belgrade-based National Bank of Serbia said today.
The bank aims for an inflation rate of 4 percent plus or minus 1.5 percentage points by the end of 2012, assuming annual price growth in the European Union stays within 1.7 percent, the European Central Bank cuts its main rate to 1 percent and the euro-area’s economy shows zero growth.
Considering the inflation outlook and the risks, rate setters believe “a continued reduction in the benchmark interest rate will be more likely in the coming period” than keeping it on hold or increasing it, the bank said.
The central bank cut its benchmark interest rate for the fifth time since June on Nov. 10 to support economic growth as inflation slows and the effect of Europe’s debt crisis expands.
Serbia’s precautionary loan program of 1.1 billion euros ($1.48 billion) and the Eurobond sale in September helped Serbia boost its “financial resilience” to external shocks compared with previous years, the bank said.
The bank also advised the government to stick with “sustainable” fiscal policies to lower the risk of a public debt crisis in Serbia.
The bank, which earlier this week said it had cut the economic growth forecast to 1.5 percent from 3 percent for 2012 on the deteriorating global outlook, said the economy grew an annual 0.7 percent in the third quarter. The economy contracted 0.4 percent from the previous three-month period.
Growth next year will be largely led by investment in the “car and crude oil industry,” the central bank said.