The National Bank of Serbia's (NBS) executive board decided on February 11 to cut the key policy rate by 0.25 percentage points to 4.25%.

At its previous meeting on January 12, the bank’s board decided to keep the rate unchanged. However, since then Serbia’s prime minister Aleksandar Vucic has announced plans to call early elections this spring, and the latest move is seen as a part of a pre-election campaign.

Although this was the first rate cut in 2016, it came after the NBS cut the key policy rate for three consecutive months in August, September and October 2015, by 0.5 percentage points each month.

The NBS said in a February 11 statement its executive board also decided to narrow the interest rate corridor from ± 2.0% to ±1.75% relative to the key policy rate. This is intended to contribute to further stabilisation of interest rates in the interbank money market, gradual reduction of the spread between the effective rate and the key policy rate, and strengthening of the interest rate transmission channel.

The executive board's decision was taken in consideration of the expected continuation of low inflationary pressures, the bank said.

“The slackening of some emerging markets, notably China, which seems increasingly certain, could have negative effects on global demand and economic growth, especially as regards the pace of growth of Serbia’s key trade partner – the euro area,” the press release reads.

According to Serbia’s central bank, the continuing decline in global prices of oil and other primary commodities, and the subdued prospects for their growth in the period ahead will also contribute to easing inflationary pressures.

The NBS expects that continued monetary easing will lead to a further decline in lending rates and sustained recovery in lending, which will contribute to higher investment.

The NBS cut the key policy rate by 0.5 percentage points to 4.5% on October 14, 2015, which was the third consecutive decrease in the key policy rate by the NBS, following similar cuts on September 10 and August 12, when the rate was also cut by 0.5 percentage points to 5% and 5.5% respectively. Cutting the key policy rate was the NBS’s attempt to contribute to Serbia’s economic recovery by monetary easing.

The next rate-setting meeting of the executive board will be held on March 17.