Serbian Inflation Rate Returns to Target, Paving Way to Rate Cut

Serbia’s inflation rate fell to the lowest level in 16 months to within the central bank’s target band, raising the chances of monetary easing.

Consumer prices rose 4.9 percent from a year earlier, after a 7.3 percent increase in August, the statistics office in Belgrade said today. The “key contribution” to slowing inflation was from monetary-policy measures, falling agricultural prices, weak demand and relative dinar stability, the central bank said on its website.

The Narodna Banka Srbije seeks to keep the inflation rate at 4 percent plus or minus 1.5 percentage points. Inflation was last within central bank’s target band in June 2012. The drivers of last month’s drop in the inflation rate will continue to weaken price pressure and keep the rate within the target band, it said.

The “immense inflation decline might open the door for a very moderate key-rate cut until the end of 2013” even as the bank maintains a “very cautious attitude” because of fiscal risks, Ljiljana Grubic, an economist at Raiffeisen Bank AD in Belgrade, said by phone.

The dinar weakened 0.3 percent to 114.2095 per euro as of 3:31 p.m. in Belgrade. The central bank bought euros today on the interbank market to curb the Serbian currency’s gains, according to three local bankers who asked not to be identified in line with their companies’ policies.

The “huge drop” in the inflation rate was “not entirely expected,” driven by food prices, a base effect, fiscal consolidation curbing domestic demand and the stable dinar, Timothy Ash, an economist at Standard Bank Group Ltd. in London, said in a note to clients.

Inflation Breakdown

September food and beverage prices, which account for more than a third of the consumer basket, rose 0.4 percent from a year earlier. Housing, water and electricity costs went up 10.6 percent, tobacco and alcohol rose 21.8 percent and health services 9.7 percent, the statistics office said.

The International Monetary Fund advised Serbia on Oct. 8 to remain cautious with monetary policy easing, which “has been appropriately put on hold,” until fiscal consolidation takes root.

The central bank has held its benchmark policy rate at 11 percent in the past three months after cutting it by a total of 75 basis points in May and June.

Before it's here, it's on the Bloomberg Terminal.