Serbia cuts rate 25 bps in first easing since April 2018

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It is the first rate cut by the National Bank of Serbia (NBS) because April 2018, as it wound up a 5-year easing cycle from May 2013 after clipping cut the main rate by 8.75 percent points.
The central bank’s executive board stated domestic and international economic developments, together with the future prospects, had set up the conditions for the rate cut, and the speed is currently at the lowest amount because NBS adopted inflation targeting as its monetary plan in January 2009.
After adopting inflation targeting, NBS was confronted with inflation which topped 10 percent through 2011, 2012 and 2013. However, in 2014 inflation finally fell and has now been below the lender ’s target of 3.0 percent, plus/minus 1.5 percentage points for the previous six years.
In May inflation fell to 2.2% from 3.1% in April, which NBS final month stated was the peak for the year, and inflation is forecast to embark on a downward path and move within its target tolerance band – albeit in the lower portion – until the end of the year and in 2020.
Low and stable inflation confirms a feeling of subdued inflationary pressures together with inflation expectations which dropped in June to under the target midpoint.
Internationally, diminished economic growth and lower than expected inflation are the main attributes, which is the reason why the ECB and Fed first made a decision to slow their rate of rate hikes and appear increasingly likely to set out on fresh financial easing, NBS stated.
“A slower pace of normalization or even a new form of monetary easing must have a positive impact on conditions in the international financial marketplace and also on capital flows to emerging markets,” ” NBS stated, underscoring its own oft-raised concern that Serbia could yield higher borrowing costs in case of disruptions in global financial markets that result in a reversal of capital flows.

     The National Bank of Serbia printed the following announcement:

“In its meeting today, the NBS Executive Board voted to reduce the key policy rate to 2.75%.
Having analysed economic developments at home and overseas and prospects going forward, the Executive Board assessed that conditions are fulfilled to reduce the key policy rate to 2.75 percent, its brand new lowest level at the inflation targeting program. The NBS provides support . Inflation was kept under management for its sixth year in a row. In accordance with the Executive Board’s announcements, in May it fell to 2.2% y-o-y. According to the Executive Board, inflation will probably continue to maneuver within the target tolerance band, most probably in its lower part, until the end of this and in the course of next year. Subdued inflationary pressures are also supported by the still low and stable core inflation, as well as financial and corporate sector inflation expectations, which dropped further in June and are now below the target midpoint.
Developments in the worldwide environment are indicated with slower economic growth and lower than expected inflation, which is the reason why the ECB and the Fed first announced a slower rate of rate hikes, although they now appear increasingly likely to start on a new round of financial easing. The ECB extended the interval over which it might continue to keep its key interest rates on hold (at least through mid-2020) and declared other accommodative steps also. Likewise the Fed hasn’t raised the goal range for the federal funds rate since last December, although marketplace expectations of a rate cut before the close of the year are gaining traction. A slower rate of normalisation or even a new round of monetary policy easing ought to have a positive effect on states in the global financial marketplace and also on capital flows to emerging markets. Besides, the oil price dropped and futures indicate it’s very likely to remain near the present level by the end of the year as well.
The Executive Board emphasized that the Serbian market’s resilience to potential negative consequences from the international environment has improved because of the degradation of internal and external imbalances and favourable macroeconomic prospects going forward. As in the previous two decades, public finances are still submitting an excess, and in the first five weeks of 2019 the current accounts deficit was fully covered by net FDI inflow. The Executive Board expects this year’s economic growth to be driven by domestic demand, i.e. consumption and investment, and that FDIs, which result in the increase in export and production capabilities, will result in a gradual narrowing of external degradation in the medium term.
The upcoming rate-setting assembly will be held on 8 August 2019.