National Bank of Serbia’s Executive Board decided to cut the key policy rate by half a percentage point, to 8.5 percent.
The decision was based on the assessment that the y-o-y inflation rate would continue to revolve around the lower bound of the target tolerance band and that the recent flooding would not lead to an increase in inflationary pressures.
Inflationary pressures are expected to stay low, supported by stable inflation expectations and exchange rate attributable to monetary policy measures, favourable balance of payments trends and the fall in the country risk premium.
Besides, the risks from international environment also subsided, partly in response to increased monetary policy accommodation on the part of the ECB. The Executive Board judges that the ECB’s move should have a positive impact on liquidity in the international capital markets.
The Executive Board maintains that the recent flooding will take its toll on economic activity, especially in the energy and agricultural sectors. Hence, it may reasonably be expected that the GDP will stagnate this year and that the balance of payments trends will be less favourable than anticipated earlier. Nevertheless, this year again, the share of the current account deficit in GDP will be lower than in the year before.
The scope of flood damage will call for additional fiscal policy efforts in the coming period. The Executive Board expects, however, that the Government will remain committed to the implementation of fiscal consolidation, structural reforms and measures aimed at further improving the business environment.
The next rate-setting meeting will be held on 10 July.
Source National Bank of Serbia
