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Dare to be Different
The National Bank of Serbia opted to hold benchmark interest rates unchanged at 6.5% for the eighth consecutive meeting, citing global uncertainties and persistent inflationary pressures as the rationale. This restrictive policy is at odds with its Central European peers, some of which are already several rate cuts deep into their easing cycles, but we applaud this prudent approach for Serbia.
Serbian inflation fell to 5.6% year over year in February, but forecasts do not show inflation dropping into its target band of 3% +/- 1.5% for a few more months. The time for rate cuts may come but caution now should help build on the long-term credibility the NBS has already earned through the measured approach to monetary policy that has been a hallmark of Jorgovanka Tabaković’s nearly 12-year tenure as Governor.
It is worth noting that the deflationary process in Serbia has been aided by the Serbian government’s long-time policy of moderate fiscal deficits, including a 2023 outturn of approximately -2.2% of GDP. In contrast, regional peers such as Poland, Czech Republic, Romania and Hungary have been running wide fiscal deficits, nearer to -5% of GDP, on average.
As real interest rates transition out of negative territory and the IMF projects relatively healthy growth of 3% in 2024, we think Serbia is likely to continue to attract strong capital inflows from foreign investors. Investors will be watching closely to see whether the central bank uses these inflows to continue growing foreign currency reserves, which are at historical highs, above EUR 25 billion, or if such flows may translate into a stronger Serbian dinar relative to the euro.
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