Serbia’s central bank became the fourth central bank to cut its benchmark interest rate by 50 basis points at an extraordinary session of its policy board, saying this was a response “in a timely and adequate manner to the increased uncertainty in the international environment caused by the spread of the coronavirus (Covid-19)”.
The National Bank of Serbia (NBS) cut its reference interest rate to 1.75 percent, a new record low since it adopted inflation targeting as its monetary strategy in 2009.
Since May 2013 Serbia’s central bank has been steadily lowering its policy rate amidst a stable economy and low inflation and has now cut the rate by 10 percentage points since then.
NBS’ executive board was scheduled to meet on March 12, the same day as the European Central Bank (ECB), but pulled forward its meeting by a day, adding its rate cut was in line with those of other central banks worldwide and the ECB is also expected to ease its monetary policy.
While 11 central banks from Sri Lanka to Mexico cut rates from late January through February, Australia’s central bank kicked off the easing spree in March and was quickly followed by the U.S. Federal Reserve, the first central bank to cut its rate an extraordinary meeting, followed by other emergency rate cuts by the central banks of the UK, Iceland and now Serbia.
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“This should contribute to reducing uncertainty in the international financial market and maintain favorable financing conditions in the coming period,” NBS said, adding it was closely monitoring any impact on the domestic economy from international financial markets and was ready to react in a timely manner with all available instruments to minimize any possible negative impacts on the domestic economy.
In addition to the growing risks to global growth from the spread of the virus, NBS said its decision to ease its policy would support credit and economic growth, and also took into account domestic factors, including the view that inflationary pressures have eased further compared with its projection in February.
In February NBS raised its estimate of Serbia’s 2019 growth to 4.2 percent from 3.6 percent and confirmed its forecast of 2020 and 2021 growth of 4.0 percent.
After being hit by drought in 2017, Serbia’s economy has bounced back with growth last year topping the central bank’s expectation with the growth in investments and household consumption countering any weakness in exports.
In the fourth quarter of 2019 gross domestic product grew 6.2 percent year-on-year while inflation rose to 2.0 percent in January, still below the bank’s target of 3.0 percent, plus/minus 1.5 percentage points.
Unlike many other central banks that have eased their policy to cushion any impact on economic activity from broken supply chains, lower trade and tourism, the NBS said its economy and financial system was “stable and strong enough to cope with the potential negative consequences of the spread of the coronavirus.”
It added Serbia’s growth prospects remain favorable, given the level of investments, while financing conditions are also favorable, factors that should continue to stimulate growth.
Data for the start of this year indicate last year’s positive growth trend was continuing though NBS acknowledged that the slowdown in global growth, and its trading partners, could have the effect of slowing growth in Serbia.
NBS expects inflationary pressures to remain low and inflation to move around the lower bound of its tolerance band until mid-2020 before gradually approaching the midpoint. Inflationary expectations are within its tolerance band one and two years ahead.
The recent fall in commodity prices should further ease any inflationary pressures, it added.
Unlike many other central banks that have eased their policy to cushion any impact on economic activity from broken supply chains, lower trade and tourism, the NBS said its economy and financial system was “stable and strong enough to cope with the potential negative consequences of the spread of the coronavirus.”
It added Serbia’s growth prospects remain favorable, given the level of investments, while financing conditions are also favorable, factors that should continue to stimulate growth.
In addition to lowering its reference rate, NBS also narrowed its interest rate corridor to 1.0 percentage points from 1.25 points, which means the deposit rate was cut 25 points to 0.75 percent while the rate on credit facilities was lowered 75 basis points to 2.75 percent.
