March 15 (SeeNews) - Erste Group has said it expects Serbia's central bank, NBS, to keep its key repo rate at 3.25% until the end of this year, before taking a modestly hawkish stance in 2019.
The central bank should keep the key rate unchanged in the coming months as inflation will pick up gradually, supported by the expected acceleration of domestic demand, cost-side pressures and the fading base effect from the prices of products that underwent one-off hikes early in 2017, Erste Group said in a Macro Outlook report on Serbia on Wednesday.
NBS said on Wednesday it decided to cut its key repo rate to 3.25% from 3.50%, based on inflation projections for the coming period. Inflation is expected to keep slowing down in the coming months but to gradually approach the middle of the 1.5%-4.5% target band by the end of 2019, NBS said.
The NBS could adopt a modestly hawkish stance in 2019, after the potential launch of European Central Bank (ECB) tapering and tightening of Fed's monetary policy under its new chairman Jerome Powell, Erste Group said.
In the upcoming period, local currency yields (LCY) of sovereign bonds will move at similar levels as in 2017, with some upside pressures in the mid-run coming from the expected pickup in inflation and the reversing monetary policy tone of ECB, Erste Group said.
"The bottom line is that we see the LCY 5Y yield gradually increasing towards 4.60% in 2018."
The macro and fiscal environment, gradually increasing capital inflows and increased LCY lending, will remain supportive for the Serbian dinar. On the other hand, the domestic demand-supported rise in imports and seasonal factors will play a key role on the opposite side, the bank noted.
"That said, we see the EUR/RSD remaining broadly stable in the region of around 117-118, with the upper part of the band more likely by the end of the year, steered by occasional NBS interventions," Erste Group added.
Last month, Erste Group said it expects Serbia's gross domestic product (GDP) to grow by 2.9% in 2018, on the back of stronger domestic demand and higher imports.