February 20 (SeeNews) - Erste Group said it expects Serbia's central bank, the NBS, to keep its key repo rate unchanged at 3.5% throughout 2018, in order to help guide inflation towards the middle of its 1.5%-4.5% target band in the second half of the year.
NBS will keep the key rate unchanged throughout the year, especially given the stronger economic data for the USA, which could lead to stronger tightening, the beginning of a rate hiking cycle in Central and Eastern Europe (CEE) and tapering by the ECB, Erste Group said on Monday in a Central and Eastern Europe Insights report.
The high base effect from the first half of 2017 will play the most important role for the inflation trajectory in the coming months, in which inflation is moving towards the lower bound of the target band. On the other hand, stronger economic activity, rising wages, the tighter labour market and closing output gap indicate stronger demand pressures, Erste Group said.
"All that said, we expect inflation to steadily move inside the target band, with the headline figure moving towards the middle of the target band in the second half of 2018."
Inflation movements in Serbia last year were significantly affected by unfavourable weather conditions in the first half, which resulted in an increase in food and firewood products. These factors pushed the headline consumer price index (CPI) figure above the middle of the target band. In the second half of the year, inflation stabilised and landed at 3% on the year in December, which wrapped up the full-year figure also at 3%, at the middle of the target band, Erste Group noted.
Earlier this month, Serbia's central bank decided to keep its key rate unchanged at 3.5%.
The inflation rate will remain within the target band of 1.5%-4.5% in the next two years, the central bank said.
Uncertainties in the international financial markets stem largely from the diverging monetary policies of the leading central banks, the Fed and ECB, which may impact capital flows to emerging economies, including Serbia. In addition, there is uncertainty around the global prices of primary commodities, especially oil, which recorded growth in the previous months, the central bank said.