By Paul Hannon


The National Bank of Serbia cut its key interest rate Thursday, joining a growing number of European central banks that are lowering borrowing costs even as the Federal Reserve awaits convincing evidence that inflation has been tamed.

Serbia's central bank cut its key interest rate to 6.25% from 6.5%, responding to a decline in the annual rate of inflation, which fell to 4.5% in May from 5% in April and was within the target range for the first months since August 2021.

The central bank, which aims to keep the inflation rate within a range of 1.5% to 4.5%, last lowered borrowing costs in late 2020, and began to tighten policy in April 2022.

The NBS said it expects inflation to continue to cool over coming months, and signaled it could lower its key rate again soon.

"The board stresses that it will keep a close eye on domestic and international markets and that future monetary policy decisions will depend on the pace of further inflation slowdown," the NBS said.

In a note to clients before the decision, Bank of America said it expects to see the key rate fall by a full percentage point by the end of this year.

The Serbian move comes a week after the European Central Bank lowered its key rate for the first time since 2019. But other policy makers had moved earlier. So far this year, the central banks of the Czech Republic, Hungary, Sweden and Switzerland have lowered borrowing costs.

By contrast, the Fed held rates steady on Wednesday and offered little evidence that they were prepared to begin lowering interest rates soon. Most officials projected they could lower rates once or twice at four remaining meetings this year, suggesting a start to cuts no sooner than September. By that time, the central banks of the U.K. and Romania may have joined the European move downward.

European central banks are taking a risk in moving ahead of the Fed, since their currencies could weaken against the U.S. dollar, pushing up prices of some imported goods and services and thereby creating a new source of inflationary pressure.

ECB Chief Economist Philip Lane said Tuesday that while a big drop in the euro's exchange rate against the dollar would be a worry, the moves to date have been modest and their impact on inflation "invisible."

For smaller European central banks, such as Serbia's, what matters most is what the ECB does with its key rate, and what impact that has on the dinar's rate of exchange against the euro, since most of its trade is with the eurozone. The ECB has provided little guidance on where its key rate may go from here, stressing the high level of uncertainty about the outlook for inflation over coming months.

"When you are in a dark room, you have to move very slowly, move with a lot of prudence," ECB Vice President Luis De Guindos said Wednesday.


Write to Paul Hannon at paul.hannon@wsj.com


(END) Dow Jones Newswires

06-13-24 0717ET