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Key Policy Rate Cut to 2.25%

At its meeting today, the NBS Executive Board cut the key policy rate to 2.25%, its new lowest level in the inflation targeting regime, whereby the NBS lends further support to credit and economic growth.

In making the decision, the NBS was guided primarily by the further weakening of inflationary pressures. Similarly to other countries in the region, as the contribution of food prices declined, primarily of vegetables in the new agricultural season, and in light of lower global oil prices, y-o-y inflation in Serbia decelerated in the past several months, reaching 1.1% in September. Subdued inflationary pressures are also indicated by core inflation, which remains low and stable, as well as inflation expectations of financial and corporate sectors being in the lower half of the target band for both one and two years ahead. According to the November central projection, y-o-y inflation will move around the lower bound of the target tolerance band until the end of this year and in the first half of 2020. It is expected to gradually converge to the target midpoint in the medium term, reflecting elevated aggregate demand.

The Executive Board underlines that the resilience of our economy to potential negative effects from the international environment has increased owing to reduced internal and external imbalances, favourable macroeconomic prospects and the record high level of FX reserves. As in the previous two years, public finances are in a surplus, and the current account deficit is fully covered by the net FDI inflow for the fifth year in a row. The latest economic indicators point to a higher than projected GDP growth in Q3, led by the recovery of manufacturing after the completed overhauls in the oil and chemical industry and activation of prior investments, as well as by the pick-up in construction and services. In the year to date, domestic factors managed to compensate for the weaker external demand. Investment continues to grow on the back of further implementation of infrastructure projects, improved business environment and favourable financing conditions. Household consumption also continues to rise on sustainable grounds, owing primarily to the prolonged positive labour market trends and lower cost of borrowing.

In addition to favourable domestic macroeconomic conditions of monetary policy conduct, the Executive Board’s decision to trim the key policy rate further was also influenced by developments in the international environment, notably the slowdown in global trade and growth, and by the monetary policy accommodation by leading central banks. In September the ECB adopted a new monetary stimulus package (the largest in three years) and announced its readiness to go to even greater lengths until a sustainable convergence of inflation to the target is achieved. As expected, in October the Fed trimmed its federal funds rate again. This will help preserve favourable global financial conditions, which should reflect positively on capital flows to emerging countries. In addition, inflationary pressures in the international environment remain low, notably in the euro area, Serbia’s key foreign trade partner.

At today’s meeting, the Executive Board adopted the November Inflation Report, which will be presented to the public on 14 November. On that occasion, we will give a detailed account of monetary policy decisions and underlying macroeconomic trends.

The next rate-setting meeting is scheduled for 12 December.

Governor’s Office