Serbia: National Bank of Serbia unexpectedly cuts policy rate 50 basis points in March
On 11 March, the executive board of the National Bank of Serbia (NBS) slashed the key policy rate by 50 basis points to a new record low of 1.75%. The Bank also decided to narrow the interest rate corridor from 1.25 percentage points to 1.00 percentage point, which brought the deposit facility rate to 0.75% and the lending facility rate to 2.75%. The Bank’s move came a day ahead of its scheduled meeting and surprised the majority of market analysts who had expected the NBS to stay on hold.
The Bank’s latest rate cut comes as the economic severity of the coronavirus pandemic looks increasingly dismal. Major central banks have already begun to loosen their policy stances to alleviate tightening financial conditions to ensure sufficient liquidity in financial markets in the wake of the fallout. Amid the bleak global economic backdrop, the National Bank of Serbia judged it had ample space to ease its own policy given below-target inflation. Regarding the domestic economic outlook, the Bank noted weaker growth in its key trading partners will likely pass through to the Serbian economy.
The Bank now sees inflation risks to be skewed to the downside as curtailed economic activity due to the virus and slumped commodity prices diminish inflationary pressures. Nevertheless, the NBS continues to expect inflation to fluctuate within the lower half of the target range until mid-2020 and then gradually approach the target midpoint thereafter on the back of stronger demand pressures.
In its forward guidance, the Central Bank reported it would “keep a close eye on developments” and stands ready to support credit conditions and economic growth. Given uncertainty over the global economic outlook and the potential risk of a further deterioration in financial conditions, further rate cuts could be on the horizon.
The next rate-setting meeting is scheduled for 9 April.