The Bank of Serbia (NBS), which has cut its rate by 150 basis points this year, added that a reduction in pensions and public sector wages would further increase disinflationary pressures.
The central bank, which has held off from cutting rates in recent months due to concern over the possible impact on capital inflows, said the government's fiscal consolidation measures and structural reforms would moderate any "negative impact of external factors" while the expected conclusion of an arrangement with the International Monetary Fund (IMF) would further enhance the credibility of the country's economic policy.
The NBS targets inflation of 4.0 percent, plus/minus 1.5 percentage points. Headline inflation in October fell to 1.8 percent from 2.1 percent in September.
In addition to its rate cut, the NBS also cut bank's foreign exchange reserve requirements by 100 basis points across different maturities and raised the dinar share of FX required reserve allocations by 200 basis points to "unlock a part of banks' credit potential, which will led to a mild reduction in the price of loans and work as an incentive to bank lending."
The Bank of Serbia issued the following statements:
"In its meeting today, the NBS Executive Board decided to trim the key policy rate by half a percentage point, to 8 percent.
In making this decision, the Executive Board was guided by the fact that y-o-y inflation has been moving below the lower bound of the target tolerance band since March and that it is likely to remain there in the coming period given that the majority of factors will maintain their disinflationary impact.
Such inflation movements can be put down to factors with a temporary effect, notably the unexpectedly low growth in administered prices and international and local prices of primary commodities. The disinflationary pressures generated by factors with a lasting effect, such as aggregate demand, will be amplified still further by the cut in pensions and public sector wages.
The Executive Board expects that the initiated implementation of fiscal consolidation measures and structural reforms will moderate the negative impact of external factors stemming from uncertainties over monetary policy moves of the world’s major economies. The Executive Board judges that the expected conclusion of an arrangement with the IMF will provide an additional assurance of the credibility of Serbia’s economic policy.
The Executive Board also adopted the November Inflation Report which gives an overview of current macroeconomic developments and monetary policy measures. The Report will be presented to the public on 19 November.
The next rate-setting meeting will take place on 11 December 2014."
"Decision Amending the Decision on Banks’ Required Reserves
In its meeting today, the NBS Executive Board adopted the Decision Amending the Decision on Banks’ Required Reserves with the National Bank of Serbia. The amendments lower FX reserve requirement ratios by 1 percentage point across different maturities (from 29% and 22% to 28% and 21%) and raise the dinar share of FX required reserve allocations by 2 percentage points (from 32% and 24% to 34% and 26%).
The lowering of FX required reserves is expected to unlock a part of banks’ credit potential, which will lead to a mild reduction in the price of loans and work as an incentive to bank lending.
The Decision Amending the Decision on Banks’ Required Reserves with the National Bank of Serbia will enter into force on the date of its publication in the RS Official Gazette. Banks will submit their calculations of reserve requirements pursuant to the provisions of this decision on 17 November 2014, made against the October 2014 balance of their dinar/FX reserve bases."