The National Bank of Serbia (NBS) reduced its reference interest rate by 25 basis points to 6.25% (chart) on June 13, in the first rate cut since December 2020. The decision aligns with a recent move by the European Central Bank (ECB) to ease monetary policy.

The ECB lowered its reference interest rate by 25 basis points on June 6, the first such change since 2019, signalling a shift in monetary policy in response to declining inflationary pressures. The NBS has indicated that it expects the US Federal Reserve to follow suit by the end of the year.

In a statement, the NBS highlighted that the rate cut is expected to lead to a gradual decrease in the cost of Euro-indexed borrowing in the domestic market. This, combined with the lowering of the reference interest rate, should support increased credit activity and domestic demand without jeopardising the downward inflation trend.

"The executive board considered the several-month downward trajectory of domestic inflation and its return to target limits in May, in line with NBS projections, as well as anticipated movements in inflation and other macroeconomic indicators both domestically and internationally," the NBS explained.

The NBS does not foresee a significant rise in import prices of goods and services. Most central banks predict that inflation will return to their target ranges by the second half of 2024 or the first half of 2025, with market participants expecting the cycle of monetary policy tightening to conclude.

Year-on-year inflation in Serbia returned to the target range of 3% plus or minus 1.5% in May, reaching 4.5%, as anticipated by the NBS executive board. The NBS projects that from the beginning of 2025, inflation will stabilise around the central target value of 3%.