At its meeting today, the NBS Executive Board decided to keep the key policy rate unchanged at 4.5%.

The decision was made in consideration of the prevailing uncertainties associated primarily with the international environment. Above all, the response of market participants to the expected increase in the Fed’s rate is uncertain, including the effects of such increase on commodity and financial markets, notably capital flows towards emerging economies. Even so, these effects will be mitigated by the ECB’s further monetary accommodation in December and the extension of quantitative easing until March 2017.

The NBS Executive Board also considered how seasonal factors may affect liquidity movements primarily with regard to energy imports during winter months and the dynamics of fiscal expenditure execution. However, progress in fiscal consolidation and narrowing in external imbalances, coupled with favourable external funding conditions, will contribute to the relative stability of the dinar in the medium run. Based on our estimate, this year’s fiscal deficit will be lower by around 40% relative to 2014. The current account deficit will be down by about one-fourth compared to last year and will be fully covered by FDI. The anticipated gradual narrowing of internal and external imbalances will boost Serbia’s resilience to shocks in the international environment in the years to come.

The Executive Board stated that inflationary pressures will remain subdued in the coming period due both to domestic and global factors. At 1.4% in October, year-on-year inflation is below the NBS target tolerance band, with inflation expectations of the financial and corporate sectors also trending below the 4.0% inflation target for one and two years ahead. Inflation is expected to return within the target tolerance band in the second half of 2016.

Given the risks associated with developments in the international commodity and financial markets, the degree of expansiveness of the NBS monetary policy in the period ahead will depend primarily on the assessment of their potential effect on inflation.

The next rate-setting meeting of the Executive Board will be held on 12 January 2016.