The National Bank of Serbia announced that the monetary council of the institution will adopt at its March 31 sitting new measures that aim at taming inflation in the country. No further details about the further tightening of the monetary policy were revealed. We recall that the central bank rose on a number of occasions last year the reserve requirement on foreign currency basis – the cumulative increase was 17 basis points to 38% – and widened the base for its estimation in a move to limit the growing external indebtedness of local commercial banks.
It also introduced a reserve requirement ratio for leasing companies. These measures did not contribute for significant moderation of credit growth, considered as one of the main drivers of inflation. However, according to the latest statement of NBS, they “have already started affecting the monetary plan”. This probably explains the optimism of the institution for March inflationary figure, which is predicted at a level not higher than the one recorded in January (0.4% month-over-month).
In case this happens the cumulative inflation in Q1, which will amount to 2.3%, will be in line with the projections, the central bank noted in its statement, adding the single-digit inflation target for end-2006 was within reach in case the required measures are adopted. We are not that optimistic with regard to price growth dynamics for the year, however, noting that the strong inflationary expectations in the country as well as the hikes of administrative regulated prices – for example the price of electricity will be raised by 15% on average as of April 1 – will fuel inflation, which is unlikely to fall to single-digit levels in case there is not a strong monetary and fiscal tightening, a scenario that seems unlikely at present.