Serbia: Central bank to keep the key rate on hold at 3.00%

At 2.6% year-on-year, August 2018 inflation marked a high for the year so far and reconfirmed the NBS forecast on inflation moving towards the 3.0% target. We forecast the inflation to remain close to but below the mid-point of the 3±1.5% target interval for the remainder of the year. Core inflation is ticking slightly higher as well, at 1.1% YoY in August, but remains subdued and doesn’t seem to have the potential to give any headaches to the NBS in the near future.

This year's dinar (RSD) fairy tale seems to be done for now as the NBS started to intervene in September to curb RSD depreciation, a first this year. We tend to see this move more in the larger context of a negative EM backdrop and less related to particular country specifics, though corporate demand for euros has been increasing along with the termination of dinar-denominated bond issuance for this year. Also, a widening trade gap and geopolitical issues still on the table are not helping; hence we could see more upside tests for EUR/RSD with the NBS ready to smooth volatility.

We have already raised our GDP growth forecast for 2018 to 4.5% as the Serbian economy seems to be on a robust and pretty well-balanced growth path based on investments and private consumption. The current 30-month non-financial arrangement with the IMF signed in July 2018 is progressing well, with the Fund upgrading its growth forecast for this year to 4.2% from 3.5%. As the current economic growth is not necessarily credit-driven, the NBS is likely to try to avoid premature tightening and delay hikes as much as possible.