Key Policy Rate Lowered to 3.75%
At its meeting today, the NBS Executive Board decided to lower the key policy rate to 3.75 per cent.
In making the decision, the Executive Board was guided by the lower current inflation as well as the reduced medium-term August inflation projection compared to the May projection, both for this and for the next year.
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 of the financial and corporate sectors which are within the target tolerance band, suggest that inflationary pressures remain low. Fiscal developments have also been significantly more favourable than expected since the beginning of the year, with achieved surplus of around 2.1% of GDP at consolidated level in the first half of the year. Furthermore, relative to the lower August projection, inflationary pressures were additionally reduced based on the lower import prices expressed in dinars and decreased country risk premium, which reached its lowest level since it has been monitored for Serbia.
The Executive Board expects inflation to remain within the tolerance band of 3.0%±1.5 pp in the period ahead. In addition to the above, factors that will also slow down inflation will be the high base of petroleum product prices and the drop out of this year’s one-off price hikes of certain products and services from the y-o-y calculation as of early 2018. For this reason, inflation will move below its current level. In the medium term, a gradual increase in the global prices of primary agricultural commodities and aggregate demand in Serbia will work in the opposite direction.
The NBS Executive Board assessed that movements in the international commodity and financial markets are still fraught with uncertainties, which mandates caution in the conduct of monetary policy. Uncertainties surround global primary commodity prices, particularly oil prices. In the international financial market, uncertainties stem largely from the diverging monetary policies of the leading central banks, the Fed and ECB, which may impact capital flows to emerging economies. However, inflation in the international environment is still low and has slowed down further in recent months, as the effects of energy price hikes wore off. 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 they had previously announced.
By lowering the key policy rate amid low inflationary pressures, the NBS provides additional support to credit activity and economic growth.
The next rate-setting meeting will be held on 9 October.