NBS cuts key policy rate to 6.25 pct

BELGRADE - The National Bank of Serbia (NBS) Executive Board decided on Thursday to trim the key policy rate to 6.25 pct and the rates on deposit and lending facilities were also lowered to 5.00 pct and 7.50 pct, respectively.

"The Board’s decision was motivated primarily by several months of declining inflation at home and its return to within the target band in May, consistent with the NBS’s projections, as well as by the anticipated movements in inflation and other macroeconomic indicators at home and abroad in the coming period. In view of the further waning of global inflationary pressures and the disinflationary impact of tight monetary measures so far, the Executive Board assessed that conditions are in place to embark on monetary policy easing by lowering the key policy rate," the NBS said in a statement.

"Global inflation has continued to subside and approach pre-pandemic levels, mostly reflecting the effects of past monetary policy tightening by central banks, weakening of cost-push pressures and the easing of global supply chain bottlenecks.

The NBS Executive Board does not expect any major increase in the prices of products and services we import, but continues to keep a close eye on all supply- and demand-side factors which could impact future inflation movements, and this will form the basis of future monetary policy decisions.

Most central banks anticipate inflation to retreat to within target bounds in H2 2024 or H1 2025, while market participants expect that the cycle of monetary policy tightening is over. At its meeting on June 6, the ECB started easing its monetary policy by lowering its key rates by 25 bp each, pointing out that its future decisions will be based on a cautious assessment of inflation dynamics and outlook.

The Fed kept monetary conditions unchanged in July, but is still expected to begin monetary policy easing before the end of the year. The expected gradual decrease in the price of euro-indexed borrowing in the local market, along with the initiated reduction of the NBS key policy rate, should contribute to a steady increase in lending activity and domestic demand, which will however not jeopardise the downward trajectory of inflation.

The Board had in mind that the relevant institutions envisage a mild decline in global oil prices in the period ahead and their view that the oil price growth sparked over the past months by heightened geopolitical tensions and an array of other factors was temporary.

Consistent with the Executive Board’s expectations, y-o-y inflation in Serbia returned to within the 3±1.5 pct target band in May, measuring 4.5 pct.

Inflation slowed down thanks to food prices, which recorded a 0.2 pct m-o-m decline in May, as well as energy prices where last year’s electricity and gas price hikes dropped out of the y-o-y rates.

At the same time, core inflation recorded a somewhat stronger increase than in April, amounting to 5 pct y-o-y. The Board expects inflation to recede further, staying within the target band in the medium term and hovering around the 3 pct target as of early 2025. Such inflation profile will be supported by the still restrictive monetary conditions, reduced global inflationary pressures, and lower inflation expectations of market agents," it also said.