It is the first rate cut the National Bank of Serbia (NBS) since October 2017 but continues an easing cycle that first began in May 2013. Since then the policy rate has been cut by 850 basis points.
But the NBS said developments in international financial markets and global commodity prices still mandate "caution" in its monetary policy, with uncertainty prevailing in financial markets due to the monetary policies of the U.S. Federal Reserve and the European Central Bank, and the relationship between their currencies.
The rate cut by the interest-rate setting of the NBS' executive board comes after the originally scheduled meeting was postponed from March 8 due to the commitments of some of its members.
In its policy statement from January the NBS said it expected inflation to drop below the midpoint of its target in the first half of this year.
While headline inflation dropped to 1.5 percent in February from 1.9 percent in January, NBS said core inflation fell to 1.3 percent in February, confirming low inflationary pressures from anchored inflation expectations around the target midpoint and growth in domestic demand.
NBS targets inflation of 3.0 percent, plus/minus 1.5 percentage points.
"By lowering the key policy rate amid low inflationary pressures, the NBS will provide additional support to credit activity and economic growth," the central bank said.
Serbia's economy slowed in the fourth quarter of last year to quarterly growth of 0.6 percent but was up 2.5 percent year-on-year for average growth last year of 2.0 percent, with activity dampened by a low harvest due to months of drought.
Serbia's jobless rate rose to 14.7 percent in the fourth quarter of last year from 13 percent in the same 2016 quarter.
This year the economy is forecast to expand by 3.5 percent.
On Monday the Serbian government, including NBS Governor Jorgovanka Tabakovic, and the International Monetary Fund began talks over future cooperation after a 3-year, US$1.32 billion standby loan agreement expired in February.
"After three years of effort under the program, the economy has turned around," the IMF said, adding Serbia had concluded the program with "flying colors" and managed to dig itself out of a hole.
The aim of the new cooperation agreement is to help Serbia catch up with other Western European countries and transform itself into a full-fledged market economy. To reach this goal it is urgent to avoid the exodus of skilled Serbian workers in search of a better life, IMF added.
The NBS has been intervening in foreign currency markets this year to curb the rise in the dinar's exchange rate and is estimated to have sold 360 million euros.
The dinar was trading at 118.29 to the euro today, up 0.4 percent this year and 4.04 percent higher than at the the start of 2017.
The National Bank of Serbia issued the following statement:
"At its meeting today, the NBS Executive Board decided to trim the key policy rate to 3.25%. In making that decision, the Executive Board was primarily guided by the inflation projection and inflation factors in the coming period.
In accordance with the NBS’s expectations, inflation in February was lowered to 1.5% year-on-year, primarily on account of the high base from the prices of products that underwent one-off hikes early in 2017. Another confirmation of low inflationary pressures is core inflation, which measured 1.3% year-on-year in February. According to the February central projection, a slowdown in inflation, on account of the base effect, is also expected in the coming months, while in the course of 2019 inflation will gradually approach the target midpoint. Growth in domestic demand will also contribute to this. That inflationary pressures have remained subdued is also indicated by anchored inflation expectations – the financial and corporate sectors expect both one- and two-year ahead inflation to be at the target midpoint (3.0%). By lowering the key policy rate amid low inflationary pressures, the NBS will provide additional support to credit activity and economic growth.
The Executive Board pointed out that caution in the conduct of monetary policy is still mandated by the international environment developments, primarily the developments in the international financial market and movements of global primary commodity prices. Uncertainty in the international financial market still prevails on account of the monetary policies of leading central banks, the Fed and the ECB, as well as the relationship between their currencies. Even though the movement of global primary commodity prices is still volatile, they are not expected to rise significantly in the coming period. The Executive Board pointed out that the resilience of the Serbian economy to potential adverse effects from the international environment has increased, owing to the strengthening of domestic macroeconomic fundamentals and a more favourable outlook for the period ahead.
The next rate-setting meeting will be held on 12 April 2018."
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