NBS Cuts Key Policy Rate by 0.50 pp to 1.75%
At its extraordinary meeting today, the NBS Executive Board voted to cut the key policy rate by 50 bp to 1.75%. In making this decision, the NBS is taking a timely and adequate response to heightened uncertainty in the international environment triggered by the spread of the coronavirus (Covid-19), which is in line with the activities taken by other central banks worldwide.
This decision is also in line with favourable movements in the domestic environment. By trimming the key policy rate in the conditions of low inflationary pressures, the NBS is providing additional support to credit and economic growth.
At the same time, the NBS decided to narrow the corridor of its main interest rates from ±1.25 pp to ±1 pp relative to the key policy rate. As a result, the deposit facility rate was cut by 25 basis points to 0.75%, while the lending facility rate was cut by 75 basis points to 2.75%.
Over the past several days, the global financial market has been under the strong impact of coronavirus contagion – global stock markets are falling, while prices of safe forms of investment, such as gold or sovereign securities of advanced economies, are rising. Heightened uncertainty poses a risk to global economic growth, prompting relevant international institutions to revise down their forecasts for global economic growth for the current year.
In such circumstances, leading central banks worldwide (US Federal Reserve, Bank of England, Bank of Canada and Bank of Australia) have decided to cut their policy rates in the past several days, announcing their readiness to take all available measures to prevent negative consequences of the coronavirus spread for global economic growth. Similar steps towards monetary policy relaxation are expected from other central banks as well (primarily the European Central Bank). This should contribute to the lessening of uncertainties in the international financial market and the maintaining of favourable financing conditions in the coming period.
The Executive Board took the decision to continue monetary policy easing taking into account the domestic factors, stronger downside risks to global growth from the international environment, and the assessment that inflationary pressures in this respect have been further moderated relative to the February medium-term projection.
The NBS points out that the domestic economic and financial system is stable and strong enough to face potential negative consequences of the spreading of the coronavirus. Also, domestic factors which have contributed to domestic economic growth in the prior years will continue to have a strong stimulating effect on economic activity in Serbia, which will largely offset any negative effects coming from the international environment. Today’s decision of the NBS is a step in this direction.
Inflation has been firmly under NBS control for the seventh year in a row. In January, in line with the NBS’s expectations, it equalled 2.0% y-o-y. Core inflation remains low and stable at 1.0% y-o-y. That inflationary pressures are low is also indicated by inflation expectations, which are below the NBS’s target midpoint both for one and two years ahead. The Executive Board expects y-o-y inflation to move around the lower bound of the target tolerance band until mid-2020 and gradually approach the target midpoint thereafter, led by a gradual rise in aggregate demand thanks also to the effects of past monetary easing by the NBS. Additional contribution to the lowering of inflationary pressures is expected to come from a drop in the prices of primary commodities, especially oil, which has been pronounced over the past days.
The Executive Board assesses that the outlook for Serbia’s economic growth remains favourable, having in mind investment, primarily into tradable sectors, and favourable financing conditions which will continue to have a stimulating effect on economic growth. Growth was 6.2% y-o-y in Q4 2019, the unemployment rate was single-digit, while available indicators from the start of this year point to a continuation of positive trends in the real sector. Support to economic growth, primarily investment growth, also comes from fiscal policy, without threatening price stability, while maintaining the fiscal balance. Still, the slowdown in global economic growth, primarily in our important trade partners, could lead to a slackening of growth in Serbia. Let us reiterate, in the conditions of low inflationary pressures and pronounced global uncertainties, by trimming the key policy rate by 50 basis points the NBS is providing additional support to credit and economic growth.
The NBS keeps a close eye on developments in the international market and assesses their potential impact on the domestic economy on a daily basis. In accordance with that, we are prepared to respond timely in the coming period with all available instruments in order to minimise a potential adverse effect of the said global developments on the domestic economy.
The Executive Board emphasises that monetary and fiscal policy measures will continue to be fully coordinated, which will facilitate the preservation of the achieved macroeconomic stability and reduction of the negative effects of developments in the international environment. The NBS will continue to closely monitor global developments and assess their implications for the domestic economy and inflation and will respond timely in order to preserve the achieved price and financial stability and contribute to sustainable economic growth of the country.
The next rate-setting meeting will be held on 9 April.