Serbia: Summary of November Inflation Report
Overview:
Inflation fell significantly in Q3 (by one percentage point) and is now in the lower band of the target range. It is expected to accelerate somewhat in Q4 due to firmer agricultural prices although it will undershoot the 8% central point of the 2009 inflation target. It should drop below the lower bound of next year’s 6% target (plus or minus 2 percentage points (pp)) in H1 before rising slightly in H2. On this basis, the National Bank of Serbia (NBS) retains a bias to cut rates despite having cut its key policy rate by a huge 750 basis points so far this year. If the IMF agreement remains on track and recent dinar weakness proves short-lived as expected, it can cut rates further next year (if at a much slower pace). This would reduce the real interest rate to levels that better reflect the weak economic recovery tentatively underway in Serbia.