Serbia: In a surprise move, the NBS cuts key interest rate to 3.25% in March
At its 14 March monetary policy meeting, the Executive Board of the National Bank of Serbia (NBS) cut its key policy rate by 25 basis points to 3.25%. The move surprised most market analysts and came after the NBS stayed put for four months. In making its decision, the NBS considered both recent inflation developments and its own inflation projections.
The policy move came amid a strengthening dinar and weaker inflationary pressures in recent months. Largely due to a high base effect, inflation moderated from 1.9% in January to 1.5% in February. As a result, it now sits at the lower bound of the NBS’s target range of 3.0% plus or minus 1.5 percentage points. Moreover, and despite core inflation inching up from 1.2% in January to 1.3% in February, it remains stubbornly low. The NBS expects inflation to continue slowing in the coming months and gradually approach its midpoint target in 2019.
A healthy economic and investment risk profile—due to robust FDI inflows, increased investor appetite for dinar-denominated assets and improved fiscal fundamentals—has also led the currency to appreciate in recent weeks. Some analysts see this development continuing and, given the NBS’ lower inflation expectations, providing space for further key policy rate cuts to alleviate the appreciation pressures on the dinar. It remains to be seen, however, whether the strengthening of the currency will prove to be temporary or whether unexpected upside inflationary pressure arise, both of which could prompt the NBS to take a more hawkish stance.
The next monetary policy meeting is scheduled for 12 April.