Serbia's central bank cut its policy rate by a further 25 basis points to 11.0 percent as it expects inflationary pressures to continue to ease in coming months but it cautioned that its future policy stance would depend on government measures to cut deficits and reform public finance.
The National Bank of Serbia (NBS), which cut its rate by 50 basis points last month due to a drop in inflationary pressure, said May inflation data should confirm its view of declining inflation, with the annual inflation rate returning to the central bank's target range of 4.0 percent, plus/minus 1.5 percentage points, by October.
In April, Serbia's inflation rate rose slightly to 11.4 percent from 11.2 percent. Last month the central banks said it expected inflation to return to its target range in the fourth quarter of this year.
Most economists had expected the central bank to keep its rate steady in light of a depreciation in the dinar since mid-May.
The NBS, which intervened last week to slow the fall in the dinar, said its executive board "attributed current developments in the foreign exchange market to trends in international financial markets and great investor risk aversion."
Today the dinar traded around 114 to the euro, down 1.6 percent from the start of the year, but up from a spike to 118 late last month.
The central bank said it expected the decline in inflation to be sustained by its recent policy measures, lower food prices in the new agricultural season and "additional fiscal consolidation measures that will eliminate uncertainty with regard to the future economic policy."
Economists have attributed to pressure on the dinar to a report from the International Monetary Fund that said the government deficit would exceed 8 percent of Gross Domestic Product, more than double the 3.6 percent target, unless policies change.
The IMF also said following its mission to Serbia that the central bank had limited room to ease policy until inflation slows and recommended that the government cut spending by at least two percentage points of GDP.
Last month the central bank cut its 2013 growth forecast to 2.0 percent from a previous 2.5 percent.
In the first quarter, the economy expanded by an annual 1.9 percent, sharply up from a contraction of 2.0 percent in the fourth quarter.
Beginning in June 2012, the Serbian central bank raised rates eight times in a row in response to rising inflation - it high a 2012 high of 12.9 percent in October - but then paused in March and April this year before cutting in May.