Monday, the National Bank of Serbia lowered its key policy rate by 150 basis points to 15%. In March, the central bank had kept the key policy rate unchanged at 16.5% for the second straight month.

The central bank said in a statement that the decision to lower the rate was based on falling inflation and low inflation expectations over the coming period. In addition, the central bank expects the pending conclusion of an arrangement with the International Monetary Fund should contribute to the maintenance of macroeconomic equilibrium.

Serbia's economic growth eased sharply in the fourth quarter. Gross domestic product increased 2.8% on an annual basis, slower than the 4.9% increase in the previous quarter.

The consumer price index rose 10.7% year-over-year in February, larger than the 11% recorded in the previous month. The central bank aims to keep inflation between 6%-10% in 2009.

The downturn in economic activity and the liquidity squeeze have already induced contraction in demand. The announced fiscal policy restrictiveness will further reduce consumption and inflation pressures, the central bank said.

It said the monetary policy restrictiveness may be further eased only if Serbia concludes a new arrangement with the IMF that will secure external sources of financing as well as guarantee an adequate degree of fiscal policy tightness.

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