March 12 (SeeNews) - Serbia's central bank may abstain from easing its monetary policy further in the short term as the deepening coronavirus pandemic could cause outflows of local currency, Austria's Erste Group said on Thursday.
"Possible negative spillovers from the Covid-19 outbreak suggested a more cautionary approach might be needed in the near term to prevent dinar outflows, in case investors start a run to safety, and keep the EUR/RSD stable," Erste Group said in an instant comment following the surprising decision of the Serbian central bank to cut its key repo rate to 1.75% from 2.25% at an unscheduled meeting late on Wednesday.
With inflation standing in the lower part of the target band, falling risk premium and ongoing easing cycle from the ECB and Fed, it makes sense for the central bank to ease its monetary policy further, but the euro-dinar rates are now expected to become the key factor for the rate-setting decisions of the NBS, Erste Group said.
"Our initial forecast was for two cuts of the key rate this year, albeit having them pencilled in the 2H20. It will be interesting to see the reaction of market participants, and the EUR/RSD will be one of the key signpost to watch in the upcoming period," Erste Bank noted.
The Serbian central bank decided to cut the key repo rate in an unscheduled meeting after markets closed late on Wednesday in response to the uncertainty on the international markets triggered by the spread of the coronavirus infection. The central bank also decided to narrow the range of its main interest rates from 1.25 percentage points to 1.0 percentage point relative to the key policy rate. As a result, the deposit facility rate was cut by 25 basis points to 0.75%, while the lending facility rate was cut by 75 basis points to 2.75%.