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Serbia Watch: Key rate cut by 25bp to 5.75%
Following the June and July rate cuts as well as a pause in August, the National Bank of Serbia (NBS) cut again the key rate by 25bp to 5.75%. We expect further cuts (one or two) still this year.
The executive Board of the National Bank of Serbia (NBS) voted to cut the benchmark rate by 25bp to 5.75%. Further, the deposit facilities rate was cut to 4.50%, and the rate on credit facilities was set at 7.00%. The decision was supported by the fact that inflation entered the inflation target (3% +/- 1.5pp) in May and NBS expects that it will remain within the band throughout the projection period. Furthermore, global inflation deceleration and the disinflationary measures undertaken by the NBS have added to today’s decision. NBS reiterated it will maintain a careful approach i.e. monetary policy decisions to be data dependent (inflation and key macro-economic data), while still estimating CPI coming at 4% (eop) in 2024 and approaching 3% in 2025. Weakening inflation momentum will be flavoured by the still low imported inflation and inflationary expectations, restrictive monetary conditions. Moreover, inflation weakening should be supported as well by the campaign “Best price” that was launched on the 1st of September and will last until October 31st. Under the campaign, citizens can purchase 81 categories of products (food, personal hygiene products, and household chemicals) with an average discount of 26.8%.
From an economic side, NBS views that investment and private consumption driven GDP growth of 4.3% in H1 and a record low unemployment rate in Q2 of 8.2%, have also contributed to the decision. Concerning the drought, NBS reflected it would not have a negative impact on the GDP, confirming its estimate of 3.8% yoy increase in 2024, but it did not mention the impact the drought could have on inflation. The institution probably views the “Best price” campaign as offsetting the potential growth in certain food products. Today the Statistical Institute, published the August inflation data. The print remained flat at 4.3% yoy just as it was in July. Monthly inflation also kept an unchanged pace at 0.4% mom vs. 0.4% mom in July. Overall, goods prices increased a bit (+0.3% mom) vs. 0.1% mom growth in July, while the services prices' growth slowed to 0.6% mom vs. 1.2% mom in July.
Forward guidance regarding the future rate cuts is the following: monetary policy decisions will depend upon the inflation deceleration dynamics taking care of the financial stability maintenance and favourable economic outlook.
Obviously, the NBS feels relaxed in terms of the domestic macroeconomic sentiment (strong GDP, low unemployment rate, stable EUR/RSD, historically high FX reserves), but also keeping an eye on the coming ECB and Fed rate cut. In that sense, we can certainly expect at least one more rate cut this year by 25bp to 5.5%, if not even an additional one at the end of the year.
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Ljiljana GRUBIC
Serbia Ljiljana joined Raiffeisen in 2001 as specialist for banking credit risk analyses, later enlarging its focus to municipalities and insurance credit risk analyses. In 2007 she moved to research team, becoming equity research analysts and afterwards in 2010 expanding its analytical skills to macro-economic analyses, becoming Economic Research Specialist. Her long experience in macro-economic analyses and forecasts was lauded by FocusEconomics awards, three years in a row, and her promotion to Chief Economist role. She is a speaker at corporate/investors conferences and roadshows organized within the Raiffeisen bank. In her spare time, she enjoys travelling and painting.
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