(Bloomberg) -- Serbia cut borrowing costs for the first time since 2020 after inflation returned to the central bank’s target range and the European Central Bank led the way with monetary easing. 

The National Bank of Serbia reduced its benchmark one-week repurchase rate by 25 basis points to 6.25%, in line with the prediction of 11 of 17 analysts in a Bloomberg survey. The rest forecast no change after annual inflation — at 4.5% in May — touched the high end of central bank’s range. 

“Inflation is seen falling further and staying within the tolerance band,” the central bank said in a statement. As of next year, the consumer-price index will probably hover around 3%, it said, echoing comments by Governor Jorgovanka Tabakovic made earlier this week. 

Policymakers in Belgrade held the benchmark steady for 10 months after tackling a burst in inflation with their steepest monetary tightening on record beginning in April 2022. Inflation peaked in March last year at more than 16%. 

Still, core inflation was higher than the CPI reading in May. Remaining price pressures stem from strong domestic demand, accelerating cash loans in dinars and public spending.

Consumption is among the main drivers of economic growth, which exceeded expectations in the first quarter with a 4.7% expansion. It’s set to moderate, with the government and the central bank forecasting 3.5% growth in 2024.

Most factors — falling inflation, the ECB cut and appreciation pressure on the dinar — have aligned for Serbia to start easing. 

The central bank reduced rates on deposit and credit facilities by a quarter point to 5% and 7.50% respectively. It bought a net €635 million ($686 million) on the local currency market in the first five months to curb excessive dinar gains, keeping the nation’s currency in a narrow range against the euro.

Bank of America sees room for a 100 basis-point cut in the benchmark rate by the end of the year, as inflation will likely remain within the tolerance range, according to strategist Vladimir Osakovskiy. 

--With assistance from Harumi Ichikura.

(Updates with central bank comment other cuts from third paragraph.)

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