Serbia Watch: Brief inflation spike didn’t open the room for a key rate change

One more time, the NBS decided to keep the benchmark rate flat at 1% feeling content with the fundamentals and anticipating that the new corona stimulus package (worth around EUR 2.1 bn, 4.3% of GDP) will keep providing oxygen to the economy. Besides the low base effect from 2020 and abundant fiscal and monetary support, important triggers for the exports, industrial production and retail sales achieving historical highs, are the revival in the EU exports demand, ease of restrictive measures supporting the reopening of the service sector and dynamic immunisation through the vaccination programme. All mentioned factors are encouraging consumers and investor’s confidence which, in conjunction with the planned infrastructural investments, will support the economic expansion in 2021.

Despite April’s higher inflation, the NBS does not foresee inflation pressure to continue, but rather expects inflation stabilisation after May, once the base effect of the oil price expires. Inflation stability will not be threatened by the low and stable core inflation rate, the stable exchange rate and anchored and low inflation expectations. The exchange rate is almost fixed, appreciating by 0.004% ytd, while FX interventions are falling from month to month given the improving macro setup and FX flows.

Further, the NBS feels encouraged by the improved global economic outlook for this year amid abundant stimuli programmes provided across the markets, as well as the FED and ECB remaining reluctant to change the interest rate prematurely.

We maintain our base case scenario, with the key rate unchanged at 1% in 2021 (eop), relying on the NBS' explicit standing to support the economy, employment and exports growth. Additionally, it will keep FX interventions, repo and FX swap auctions.