Serbia’s central bank decided to cut the monetary policy interest rate by 25bps to 3.75% at its monetary policy board meeting on September 7. The policy rate has been held constant at 4% since July 2016, after it had been cut by 1.25pp in five steps in less than one year (August 2015 - July 2016).

Slower expected inflation was factored into the decision on the policy rate cut, the central bank explained in the press release issued after the monetary board meeting. The central bank expects inflation to remain within the tolerance band of 3.0%±1.5pp in the period ahead.

“Low and stable core inflation at the level of around 2% year-on-year, which went down to 1.7% in July, as well as inflation expectations (within the target tolerance band), suggest that inflationary pressures remain low,” the bank said in a statement. 

The international context is also supportive of the rate cut, the central bank explained. Inflation in the international environment is still low and has slowed down further in recent months. In addition, despite the economic recovery, there are no signals of a rise of inflationary pressures on the demand side or that the leading central banks might tighten their monetary policies faster than previously announced.

At home, GDP growth that is likely to fall below expectations in the year (2% growth is now envisaged by the government, versus 3% initial expectations) and the local currency’s strengthening were other relevant factors in central bank’s assessment.

“By lowering the key policy rate amid low inflationary pressures, the NBS provides additional support to credit activity and economic growth,” the central bank commented.