Serbia's central bank cut its policy rate by 50 basis points to 10.5 percent, its third rate cut this year, saying inflationary pressures are expected to continue to ease while inflation expectations have fallen to their lowest on record which should help maintain inflation within the bank's target band.
Serbia's inflation rate fell to 4.9 percent in September, the first time in 15 months that inflation fell below the central bank's upper limit of 6.0 percent, stoking expectations that the central bank may cut rates today. In August the bank had also said it would consider cutting rates if external risks subsided and the government were to cut spending.
The bank targets inflation of 4.5 percent, plus/minus 1.5 percentage points and raised rates by 150 basis points in 2012 and then by 50 basis points in January and February. It then froze rates in March and April but encouraged by a fall in inflation, it cut rates in May by 50 basis points and by a further 25 basis points in June for total cuts this year of 75 basis points.
The bank said the key contribution for inflation to return to the target range was from past monetary tightening, the fall in agricultural commodity prices, the relatively stability of the dinar and low aggregate demand.
"Looking ahead, these factors will continue to moderate inflationary pressures and will help maintain inflation within the target band," the bank said, adding that inflation expectations had fallen to their lowest level on record and are expected to stabilize within the band in the foreseeable future.
The central bank said its decision to cut rates was also influenced by reduced fiscal risks following the government's announcement of fiscal consolidation measures, which together with low demand, "will serve as a strong disinflationary factor in the next year as well."
A proposed VAT increase will generate a one-off, "weaker direct and indirect effects on inflation," the central bank added.
Another development paving the way for the rate cut was expectations of "positive trends in international financial markets as a result of the US budget deal," the bank said.