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Inflation 6.6 Percent in 2006

With December inflation at 0.1%, 2006 headline inflation will amount to 6.6% and is lower than planned. Core inflation has fallen short of the projected range of 7 to 9 percent and amounted to 5.9%, indicating that the new monetary policy framework adopted by the NBS in September was successful in substantially lowering both inflation and inflation expectations. Restrictive monetary policy, supported by a responsible fiscal policy, yielded positive results, achieving the objective and toppling inflation from 17.7% in 2005 to only 6.6% this year.

Contrary to claims of detractors, the significant fall in inflation affected neither economic growth nor exports, which have been growing at robust rates. All this against a background of preserved exchange rate stability and doubling of foreign exchange reserves to over USD 12 billion, with net foreign direct investments hitting record highs of around USD 4 billion.

NBS objective for the next year is to further strengthen the downward path of inflation, building on the firm foundations set in 2006. Core inflation is planned to be between 4 and 8 percent in 2007, but there is likelihood that the corridor will narrow down and gravitate towards the lower limit. This will depend primarily on whether the fiscal policy remains sufficiently restrictive in 2007. The National Bank of Serbia will take all necessary measures in order to meet its objective, assert the credibility of new monetary regulations and still more firmly “anchor” lowered inflation expectations of the corporate sector.

However, the NBS needs to warn that long-term sustainability of low inflation, stable exchange rate and economic growth trends will be contingent upon the lifting of all political barriers to continuation of negotiations with the European Union, as well as on unhindered continuation of corporate sector restructuring, completion of privatization, budgetary surplus, and creation of conditions for substantial further inflow of foreign direct investments. Although the year 2006 was a year of significant achievements on the plane of macroeconomic consolidation, now is not the time to relax, but to continue and complete the work that needs to be done in the process of transition.

Press Release from Governor’s Office