Serbia's central bank cut its key policy rate by 50 basis points to 9.0 percent, clearly relieved that "no negative impact on the country's risk premium and external trade has so far resulted from the Fed's QE tapering and geopolitical tensions arising from the Ukrainian crises."
The Bank of Serbia (NBS) had maintained its rate since December last year despite falling inflation, aware of the need to keep Serbian assets attractive at a time when the U.S. Federal Reserve was pulling back from its asset purchases due to improved growth in advanced economies.
Last month the NBS maintained rates due to the geopolitical tensions and instability in financial markets, but said the government's plan to cut the deficit would now open the scope for easing.
Financial markets have continued to respond positively to the government's economic measures, which "would stabilize inflation at a low level and create the room for further monetary policy easing," the NBS said.
The NBS said the rate cut reflected the decline in inflation to the lower bound of its tolerance range and falling inflationary pressures.
"Strong disinflationary pressures in the coming period will be generated by low aggregate demand, arising from, among other things, the credit downturn and adverse developments in the labour market," the central bank said, adding low food production costs will also have a disinflationary effects while the dinar currency is stable, helped by the low current account deficit.
Serbia's headline inflation rate fell to 2.3 percent in March from 2.6 percent. The central bank targets inflation at a midpoint of 4.0 percent, plus/minus 1.5 percentage points and its latest inflation report will be published on May 14.
In 2013 the NBS cut its rate by 175 basis points as inflation eased following the bank's 150-basis-point rate hike in 2012.