Key Policy Rate Cut to 2.75%
At its meeting today, the NBS Executive Board voted to cut the key policy rate to 2.75%.
Having analysed economic developments at home and abroad and prospects going forward, the Executive Board assessed that conditions have been met to cut the key policy rate to 2.75%, its new lowest level in the inflation targeting regime. The NBS thereby provides additional support to economic growth. Inflation has been kept firmly under control for the sixth year in a row. In accordance with the Executive Board’s announcements, in May it declined to 2.2% y-o-y. As underscored by the Executive Board, inflation will continue to move within the target tolerance band, most probably in its lower part, until the end of this and in the course of next year. Subdued inflationary pressures are also confirmed by the still low and stable core inflation, as well as financial and corporate sector inflation expectations, which declined further in June and are currently below the target midpoint.
Developments in the international environment are marked by slower economic growth and lower than expected inflation, which is why the ECB and the Fed first announced a slower pace of rate hikes, while now they appear increasingly likely to embark on a new round of monetary easing. The ECB extended the period over which it would keep its key interest rates on hold (at least through mid-2020) and announced other accommodative measures as well. Similarly, the Fed hasn’t raised the target range for the federal funds rate since last December, though market expectations of a rate cut until the end of the year are gaining traction. A slower pace of normalisation or a new round of monetary policy easing should have a positive impact on conditions in the international financial market and on capital flows to emerging markets. Besides, the global oil price declined and futures indicate it is likely to stay close to the current level by the end of the year as well.
The Executive Board stressed that the Serbian economy’s resilience to potential negative effects from the international environment has increased owing to the narrowing of internal and external imbalances and favourable macroeconomic prospects going forward. As in the past two years, public finances are posting a surplus, and in the first five months of 2019 the current account deficit has been fully covered by net FDI inflow. The Executive Board expects this year’s economic growth to be driven by domestic demand, i.e. investment and consumption, and that FDIs, which contribute to the increase in production and export capacities, will result in a gradual narrowing of external imbalances in the medium term.
The next rate-setting meeting will be held on 8 August 2019.