The National Bank of Serbia (NBS) executive board decided to cut the key policy rate to 3.5% on October 9, folowing cut to 3.75% on September 7, after keeping it stable at 4% for the previous 13 months, the bank announced in a statement.

The NBS’s decision to cut the key policy rate was guided by the medium-term inflation projection and movements in key inflation factors. The central bank also says that by further lowering the key policy rate amid low inflationary pressures, it provides additional support to credit activity and economic growth.

The NBS said that since early 2017, annual inflation has been moving within the target tolerance band, falling to 2.5% in August. Core inflation declined further – to 1.5% y/y, as well as both one- and two-year ahead inflation expectations, which signals the persistently low inflationary pressures. In addition, the negative effects of the drought on food prices were weaker than expected. 

“Compared to the August projection, other factors working towards lower inflation are subdued dinar import prices and the fact that the country risk premium fell to its lowest level on record for Serbia. Furthermore, fiscal movements are more favourable than expected, as confirmed by the consolidated surplus of around 2% of GDP in the period of eight months,” the central bank said on October 9.

Serbia’s headline inflation, reported under COICOP methodology, decreased to 2.5% y/y in August from 3.2% y/y in July, following the broader disinflationary pattern seen since April, according to statistics office data released on September 14.

However, the NBS executive board expects inflation to remain within the target tolerance band of 3.0%±1.5 pp in the period ahead. In addition to the above factors, inflation will be slowed down by the high base from the prices of petroleum products and, as of early 2018, by the drop-out of this year’s one-off price hikes of certain products and services from the y/y calculation. A gradual increase in the global prices of primary agricultural commodities and aggregate demand in Serbia will work in the opposite direction in the medium term. 

The NBS executive board previously decided to cut the key policy rate on July 7, 2016 when it was lowered by 0.25pp to 4%. Previously the rate had been kept at 4.25% for four consecutive months. That was the second cut in 2016, as on February 11 the board cut the key policy rate by 0.25pp to 4.25%. The rate was also cut in August, September and October 2015.

The NBS announced that the next rate-setting meeting will be held on November 9.