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Key Policy Rate Cut to 3.5 Percent

At its meeting today, the NBS Executive decided to cut the key policy rate to 3.5%.

In making the decision, the NBS Executive Board was guided by the medium-term inflation projection and movements in key inflation factors.
Since early 2017, y-o-y inflation has been moving within the target tolerance band, falling to 2.5% in August. Core inflation declined further – to 1.5% y-o-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 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-o-y calculation. A gradual increase in the global prices of primary agricultural commodities and aggregate demand in Serbia will work in the opposite direction over the medium run. 

The Executive Board stated that developments in the international commodity and financial markets are still fraught with uncertainty. Uncertainties also surround global primary commodity prices, as attested by the volatility of oil prices during September. Uncertainties in the international financial market continue to stem largely from the diverging monetary policies of leading central banks, the Fed and the ECB, which may affect capital flows to emerging economies. However, despite the global economic recovery, for the time being there are no signals of a rise in inflationary pressures on the demand side or that leading central banks might tighten their monetary policies faster than previously announced. In addition, the Executive Board emphasises that today, owing to a favourable macroeconomic outlook, Serbia is more resilient to potentially adverse effects from the international environment.
By further 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 of the Executive Board will be held on 9 November.

Governor’s Office