Serbia’s central bank trimmed its policy rate for the second month in a row to provide additional support to the domestic economy while inflation is firmly under control at a time of slower global trade and growth that is leading to easier monetary policy by leading central banks.
The National Bank of Serbia (NBS) cut its policy rate by another 25 basis points to 2.50 percent, a new low since the central bank adopted inflation targeting as its monetary strategy in January 2009.
NBS has now lowered its main rate by 50 basis points this year, with the cut last month the first since April 2018.
“By cutting the rate to a new lowest level in the inflation targeting regime, the NBS provides addition support to credit and economic growth,” the central bank said, adding the decision was made in the context of the new August inflation report, which will be presented Aug. 14.
Inflation is forecast to trend within the bound’s of NBS’ target tolerance band of 3.0 percent, plus/minus 1.5 percentage points over the next two years, most probably in the lower part of the band.
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Serbia’s inflation rate decelerated to 1.5 percent in June from 2.2 percent in May and in June the NBS also forecast that inflation would move within the lower part of its target range this year and next year.
In addition to low inflation, the NBS said its decision was made in the light of international developments, mainly the slowdown in global trade and growth that is being accompanied by “increasingly clear signals hinting at monetary policy accommodation, followed by actual measures by leading central banks,” which should help maintain favorable global financial conditions longer than initially expected and thus have a positive impact on capital flows to emerging economies.
However, NBS again said there were still factors warranting caution in monetary policy, pointing to global trade tensions and the possibility that decisions by leading central banks may deviate from market expectations as well as movements in oil prices and other commodities.
Serbia’s economy slowed in the first quarter of this year to 2.5 percent annual growth from 3.4 percent in the previous quarter but NBS expects growth this year to be led by domestic demand, i.e. investment and consumption, foreign direct investment and exports, that will continue to narrow external imbalances.
After Serbia’s economy took a hit from drought in 2017, growth rebounded to 4.3 percent in 2018 – its fastest pace in 10 years – and fiscal discipline has now taken root with the general government budget in surplus for two consecutive years and public debt falling by about 15 percent of gross domestic product since 2017.
Last month the International Monetary Fund said Serbia’s near-term outlook remained positive, with growth this year seen at 3.5 percent, and activity improving in the second half due to strong foreign direct investment, continued public investment and an assumed recovery in trading partners.
The National Bank of Serbia issued the following statement: