Serbia's central bank cut its policy rate by another 50 basis points to 8.5 percent, saying it doesn't expect recent flooding in the country to lead to inflationary pressure and the inflation rate should remain around the bank's lower tolerance range.
"Inflationary pressures are expected to stay low, supported by stable inflation expectations and an exchange rate attributable to monetary policy measures, a favorable balance of payments trend and the fall in the country risk premium," the Bank of Serbia (NBS) said.
In addition, the European Central Bank's (ECB) increased monetary policy accommodation has helped ease international risks, it said.
"The Executive Board judges that the ECB's move should have a positive impact on liquidity in the international capital markets," the central bank said, referring to the ECB's moves last week to cut its rates along with a series of measures to boost the euro area's inflation rate and economy.
The Serbian central bank cut its rate by 50 basis points in May after keeping it steady since December, relieved that the conflict in the Ukraine and the tapering of quantitative easing by the U.S. Federal Reserve had not impacted investors' view of Serbian assets.
At that point, the central bank said the new government's measures would create room for further monetary easing.
However, most economists had expected the central bank to keep rates steady today in light of the massive floods in late May that have caused economic damage of up to 2 billion euros. The European Bank for Reconstruction and Development has said the floods could cause an economic decline of up to 1.5 percent this year and could also push up inflation.
Serbia's headline inflation rate was steady at 2.1 percent in May and April, below the central bank's target of 4.0 percent, plus/minus 1.5 percentage points.
In its May inflation report, the NBS forecast inflation remaining within its tolerance band in the second half of this year and in 2015, settling slightly above 4.0 percent by the end of this year, with low domestic demand the main disinflationary factor both in the short and medium term.
The NBS acknowledged that the floods would take its toll on economic activity and that "it may reasonably be expected that the GDP will stagnate this year and that the balance of payments trends will be less favorable than anticipated earlier."
Nevertheless, the central bank said it still expects the current account deficit as a percentage of GDP to decline from 2013's 5.0 percent.
"The scope of flood damage will call for additional fiscal policy efforts in the coming period," the bank said, adding that it still expects the government to implement fiscal consolidation, structural reforms and other measures that will improve the business environment.