Serbia Commits to Inflation Targeting With Interest Rate

Serbia’s central bank said it would keep its inflation-targeting monetary-policy framework and use the one-week repurchase rate as its key policy instrument in steering inflation toward target levels in the medium term.

The main goal is to achieve targeted inflation in the medium term, while the interest rate will be changed “in a consistent and predictable manner, depending on economic conditions and the inflation outlook,” the Narodna Banka Srbije in the capital Belgrade said in its semi-annual Monetary Policy Report.

The interest rate direction will depend on “the pace and strength of fiscal consolidation, agreement with the International Monetary Fund and food prices and their impact on inflationary expectations,” the bank said in a report posted on its website today.

The central bank has encouraged Prime Minister Ivica Dacic, whose Cabinet took office in July, to negotiate an agreement with the IMF, which will convince investors in the government’s deficit and debt-cutting plans and help gain access to cheaper cash. The IMF wants to see how Serbia handles its budget deficit and is seeking a restoration of the central bank’s autonomy before it commits to a new program.

Inflation

Inflation will continue to rise through the end of the first half of next year and return to within a “tolerance band” by the end of 2013. The bank sees inflation between 9 percent and 10 percent by the end of this year. It accelerated to 7.9 percent in August from a 30-year low of 2.7 percent in April.

The central bank will target inflation at 4 percent plus or minus 1.5 percentage points through 2014, with consumer prices almost double the levels in developed economies because Serbia will not “complete structural reforms or price stabilization, or nominal, real and structural convergence with the European Union,” it said.

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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