Serbia cuts rate second time inflation seen in control

August 8, 2019

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.

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.

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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 IMF forecast average inflation this year of 2.4 percent, up from 2.1 percent in 2018.

The National Bank of Serbia issued the following statement:

“At its meeting today, the NBS Executive Board voted to trim the key policy rate to 2.5%. By cutting the rate to a new lowest level in the inflation targeting regime, the NBS provides additional support to credit and economic growth.

In making the decision, the Executive Board was mainly aware of the new, August medium-term inflation projection and the expected movements of other macroeconomic indicators at home and abroad in the period ahead. According to the August projection as well, inflation will be firmly under control as in previous years, and will continue to trend within the bounds of the target tolerance band (3.0±1.5%) until the end of the projection horizon i.e. over the next two years – most probably in its lower part of the target band. Y-o-y inflation in June decreased to 1.5%, confirming the announcements by the Executive Board that it would slow down as of May. Subdued inflationary pressures are also confirmed by still low and stable core inflation, as well as financial and corporate sector inflation expectations which undershot the 3.0% target for both one and two years ahead.

In addition to domestic macroeconomic conditions conducive to monetary policy pursuit, the Executive Board’s decision on the rate cut was also made in light of international developments, notably the slowdown in global trade and growth and the increasingly clear signals hinting at monetary policy accommodation, followed by actual measures by leading central banks. As had been expected, the Fed lowered the key rate at end-July, while the ECB announced an unchanged or lower level of its key interest rates at least through mid-2020, with a new programme of longer-term refinancing operations as of September. This will help maintain favourable global financial conditions longer than initially expected, which should have a positive impact on capital flows toward emerging economies. However, there are still factors warranting caution in monetary policy conduct, the main ones being global trade tensions, a possibility that monetary policy decisions of leading central banks might deviate from market expectations in the coming period, as well as movements of oil prices and other primary commodities in the global market.

The Executive Board points out that the resilience of our economy to potential adverse effects from the international environment has increased owing to reduced internal and external imbalances and favourable macroeconomic prospects. As in the previous two years, public finances recorded a surplus in the first half of 2019 and the current account deficit was fully covered by the net inflow of foreign direct investment. The Executive Board expects that economic growth this year will be led by domestic demand, i.e. investment and consumption, and that foreign direct investment, which supports the expansion of our production and export capacities, will lead to the gradual narrowing of external imbalances in the medium term.

At today’s meeting, the Executive Board adopted the August Inflation Report, which will be presented to the public on 14 August. On that occasion, we will give a detailed account of monetary policy decisions and underlying macroeconomic trends.

The next rate-setting meeting will be held on 12 September.”

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Serbia cuts rate second time inflation seen in control