(Bloomberg) -- Serbia resumed monetary easing after a pause last month as the central bank forecasts inflation to slow further and European and US policymakers are expected to lower interest rates.
The National Bank of Serbia reduced its one-week repurchase rate by a quarter of a percentage point to 5.75% on Thursday, the lowest level since March last year. The decision matched forecasts of 12 among 17 economists in a Bloomberg survey, while the others expected no change in the benchmark.
“Monetary policy still has a restrictive character,” the central bank said in a statement. The annual inflation rate returned to the 1.5%-4.5% tolerance band in May, and it will stay there at least in the medium term with a tendency to decline closer to the 3% target, it said.
Serbia paused easing in August after two cuts as rate-setters examined lingering price pressures accompanying robust economic growth. A spike in food prices pushed inflation rate up to 4.3% in July, after 15 consecutive declines, and price growth kept the same pace last month, according to data also published Thursday. The central bank sees inflation easing to around 4% later in the year.
Like many other developing economies, Serbia is closely watching policy moves by the European Central Bank and the Federal Reserve as their decisions shape investors’ perception of risker assets. The ECB is expected to cut rates later on Thursday, while the Fed looks poised to follow suit on Sept. 18.
Lower interest rates should help ease demand for the dinar, which Serbia keeps in a tight range against the euro in a so-called managed float. The central bank bought a net €1.84 billion ($2 billion) on the local market in the first eight months to ease the appreciation pressures.
Serbia’s first-half economic expansion of 4.3% was among the strongest in Europe, despite a slowdown in the second quarter. The government anticipates annual growth of 3.8% this year.
Economic growth is supported by lower inflation, rising real wages and a decline in the unemployment rate — to a record low of 8.2% in the second quarter — while credit conditions improved due to monetary easing, according to the central bank.
Erste Group Bank AG said it sees another quarter-point rate cut by the end of the year and predicts further easing by 100 basis points in total in 2025.
“The pace of cuts would thus be similar to what is expected from the ECB by markets, but with inflation in-check and continuously strong FDI pushing the dinar higher, there could be enough space to squeeze in an extra cut,” said Erste analyst Mate Jelic.
--With assistance from Harumi Ichikura.
(Updates with central bank comment in third, last paragraphs, adds chart)
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