Serbian town in the winter

Serbia Monetary Policy December 2020

Serbia: Central Bank cuts interest rate to new all-time low in December

At its final meeting of the year held on 10 December, the Executive Board of the National Bank of Serbia opted to trim the key policy rate by 25 basis points to 1.00% from 1.25%. The new rate marks an all-time low, and the decision follows last month’s meeting during which the Board hinted at potential additional rate cuts. In addition, the Bank narrowed the main interest rate corridor from around 1.0% to around 0.9%, and reduced the deposit facility rate by 15 basis points to 0.1% and the lending facilities rate by 35 basis points to 1.9%.

In cutting the key policy rate, the Bank utilized available monetary space to support the economy amid weakening momentum in the winter months due to the second wave of Covid-19 infections and subsequent tightening of restrictive measures. Moreover, the decision came in light of low and stable inflation and well-anchored inflation expectations. Meanwhile, the Bank upgraded its GDP forecast for this year from a 1.5% contraction to a 1.0% fall. This came on the back of a softer-than-expected drop in output in the second quarter and a stronger-than-anticipated recovery in the third—made possible by supportive monetary and fiscal policies, which maintained productive capacity in the economy and limited the hit to employment. Noting the positive medium-term outlook, the Bank forecasts the economy to grow around 6% next year and inflation is expected to gradually approach the midpoint of the 1.5%–4.5% target range in 2022.

In its accompanying statement, the Bank reiterated its commitment to support economic growth and to continuously assess the impact of previous measures on the recovery, “without prejudice to price and financial stability”. Moreover, the Bank stated it will continue with additional FX swap auctions and repo securities purchase auctions to provide the banking sector with ample liquidity.

The next meeting is scheduled for 14 January 2021.

Commenting on the decision, Jessica Murray, analyst at JPMorgan, noted:

“The bank has now delivered 125bp of easing during 2020, but the uncertainty of the virus path, in the context of subdued inflation, means that policy makers are likely to maintain a dovish bias. Though there is little room to lower the deposit rate further as it approaches the zero-lower bound, there is space for further reductions of the key policy rate, since real interest rates are still less negative in Serbia than in CEE peers. Another rate cut is therefore possible next year if the recovery falters against our expectation.”

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