By CentralBankNews.info
Serbia’s central bank lowered its key interest rate for the third time this year to ease the negative effects on the country’s economy from the spread of the coronavirus and boost growth against a backdrop of low and stable inflation and the unprecedented global economic recession.
The National Bank of Serbia (NBS) cut its key policy rate by another 25 basis points to 1.25 percent, surprising most analysts who expected the rate to be maintained, and has now cut it by 100 points following cuts in April and March.
NBS has been in a monetary easing cycle since May 2013 and has cut its rate 27 times and by a total of 10 percentage points since then.
The central bank said today’s rate cut took into account its previous easing and fiscal stimulus, and what it said was “a reasonable conduct of economic policy”, which meant Serbia had faced the crises in a better position than in earlier crises. This had created the scope for further easing.
Serbia is facing a nation election on June 21.
NBS said it would continue to keep a close eye on global developments and their impact on Serbia’s economy and would “respond in a timely manner to preserve the achieved price and financial stability, and contribute to sustainable growth.”
As other countries in Europe, NBS expects the worst effects of the measures to control the virus to impact the country’s economy in the second quarter of this year – especially the month of April – and a recovery will begin in the second half.
The global economic downturn is estimated to lead to lower than previously expected inflation as the negative effect of the pandemic on demand will outstrip the negative effect on supply.
NBS forecast in its May inflation report the country’s economy would shrink 1.5 percent this year, down from growth of 4.2 percent in 2019, before recovering and expanding around 6 percent in 2021.
It should then return to a stable growth path of around 4 percent.
“As the Covid-19 pandemic has pulled the global economy into an unprecedented recession and it is increasingly certain that it will open gradually, many central banks have adopted new measures to encourage faster recovery,” NBS said.
Reflecting subdued demand and low oil prices, inflation is expected to move around the lower bound of the central bank’s target tolerance band of 3.0 percent, plus/minus 1.5 percentage points, the rest of this year and then gradually rise toward the midpoint in 2021 as demand recovers.
Serbia’s inflation rate fell to 0.6 percent in April from 1.9 percent in March while its gross domestic product shrank 0.6 percent in the first quarter of this year from the previous quarter for year-on-year growth of 5.0 percent.
The National Bank of Serbia issued the following statement:
“At its meeting today, the NBS Executive Board voted to continue monetary policy easing and cut the key policy rate by 25 basis points to 1.25%.
In making such decision, the Executive Board had in mind that the scale of the global crisis caused by the spread of the coronavirus (Covid-19) calls for additional monetary policy support to the domestic economy, in order to mitigate the negative effects of the crisis and boost economic growth in the period ahead. The Board took into account the previously taken measures involving substantial monetary accommodation and fiscal stimuli, but also the fact that, thanks to a responsible conduct of economic policy, Serbia faced this crisis in a much better macroeconomic position than in the case of earlier crises. This has created scope for further monetary easing and provision of support to the economic recovery of the country.
The Board emphasizes that the decision on further trimming of the key policy rate was taken in an environment of low and stable inflation which continued to slow in April to 0.6% y-o-y, consistent with NBS expectations. According to the Board’s estimate, inflation is likely to move around the lower bound of the target tolerance band (3±1.5%) in the remainder of the year against the backdrop of dampened aggregate demand and lower import prices, including oil prices. Inflation is expected to gradually get closer to the midpoint in the medium run, on account of the recovery of demand supported by monetary and fiscal policy measures.
As the Covid-19 pandemic has pulled the global economy into an unprecedented recession and it is increasingly certain that it will open gradually, many central banks have adopted new measures to encourage faster recovery. Particularly important for us is the euro area recovery, which should be supported by the recent ECB measures aimed at providing liquidity and supporting favourable financing conditions. Coordinated monetary and fiscal policy measures in many countries across the world should contribute to more favourable financing conditions and encourage economic recovery in the coming period. The Board also had in mind that due to weaker global growth prospects, the prices of primary commodities in the global market, primarily of oil, will remain relatively low.
The Board particularly emphasized the fact that the effects of the pandemic on the Serbian economy will be significantly mitigated with the additional key policy rate cut, together with earlier adopted monetary and fiscal policy measures. It is almost certain that the strongest effects of the crisis were felt in Serbia in April, as was the case with most other European countries, while the months to come will experience recovery, supported by the undertaken measures. This will lead to GDP growth of at least 6% in 2021, without prejudice to price and financial stability.
As underscored by the Executive Board, the full coordination of monetary and fiscal policy measures will continue, which will help diminish potential further negative effects from the international environment. The NBS will continue to keep a close eye on global developments and their implications for the domestic economy and inflation, and will respond in a timely manner to preserve the achieved price and financial stability, and contribute to sustainable growth.
The next rate-setting meeting will be held on 9 July.”
