Serbia’s central bank lowered its policy rate by 25 basis points to 2.75 percent to support economic growth amid subdued inflationary pressures and an “increasingly likely” new round of monetary easing by the U.S. Federal Reserve and the European Central Bank (ECB).
It is the first rate cut by the National Bank of Serbia (NBS) since April 2018, when it wrapped up a 5-year easing cycle from May 2013 after cutting cut the key rate by 8.75 percentage points.
The central bank’s executive board said domestic and international economic developments, along with the future prospects, had set up the conditions for the rate cut, and the rate is now at the lowest level since NBS adopted inflation targeting as its monetary strategy in January 2009.
After adopting inflation targeting, NBS was faced with inflation that topped 10 percent during 2011, 2012 and 2013. But in 2014 inflation finally fell and has now been below the bank’s target of 3.0 percent, plus/minus 1.5 percentage points for the last six years.
In May inflation dropped to 2.2 percent from 3.1 percent in April, which NBS last month said was the peak for the year, after which inflation is expected to embark on a downward path and move within its target tolerance band – albeit in the lower part – until the end of this year and in 2020.
Low and stable inflation confirms an environment of subdued inflationary pressures along with inflation expectations that fell in June to below the target midpoint.
Internationally, slower economic growth and lower than expected inflation are the main characteristics, which is why the ECB and Fed first decided to slow their pace of rate hikes and now appear increasingly likely to embark on new monetary easing, NBS said.
“A slower pace of normalization or a new round of monetary easing should have a positive impact on conditions in the international financial market and on capital flows to emerging markets,” NBS said, underscoring its oft-raised concern that Serbia could face higher borrowing costs in the event of disruptions in global financial markets that lead to a reversal of capital flows.
The National Bank of Serbia published the following statement: