National Bank of Serbia cut its key interest rate

National Bank of Serbia cut its key interest rate to a record low level, benefiting from the improved economic prospects of loosen policy, despite continuing uncertainty amid the crisis after UK vote. The central bank decreased the one-week repo interest rate to 4% from 4.25%, which was surprising decision for the economists and markets.

“The weak inflationary pressures will remain under the influence of external factors. The decrease of interest rates ensures that inflation will return to target next year”, says the official statement of National Bank of Serbia.

Inflation remains outside the target range of the National Bank of Serbia between 2.5% and 5.5%. This is the first mitigation policy of the Serbian central bank since February. Before that, the central bankers made 16 rate cuts by 11.75% to 4.25%. The decision comes amid ongoing negotiations of Prime Minister Aleksandar Vucic to form a government after elections in April.

Meanwhile, yields on Serbian dollar bonds maturing in 2021 rose by three basis points to 3.981%, after falling below 4% for the first time on Wednesday. The dinar gained 0.1% against the EUR. The investors withdrew about 1.7 billion EUR from Serbia this year, said Central Bank Governor Yorgovanka Tabakovic last month, prompting monetary authorities to sell EUR to the market to smooth out fluctuations in the currency.

The government expects economic growth this year of at least 2.5%. The government has made progress in reducing its budget deficit after a decision by the International Monetary Fund (IMF) stabilization loan. But the national debt continues to grow, but early elections may defer the promised changes in the budget sphere and sales of unprofitable state enterprises.

The Prime Minister promised to increase pensions and salaries in the public sector to compensate for the cuts made in 2014. The aim was to ensure the deal with the IMF worth 1.2 billion EUR.

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