Inflation targeting

The NBS has been implementing a fully-fledged inflation targeting regime since 2009, with elements of the regime gradually introduced into practice since 2006.

In December 2008, the Monetary Policy Committee of the National Bank of Serbia adopted a Memorandum on Inflation Targeting as Monetary Strategy, which defines formal implementation of the inflation targeting regime as of 1 January 2009. The principles of this monetary policy regime have been gradually introduced into practice by the National Bank of Serbia pursuant to the Memorandum on the New Monetary Policy Framework, adopted in August 2006.

The Memorandum on Inflation Targeting as Monetary Strategy has been prepared in compliance with the Agreement between the National Bank of Serbia and the Government of the Republic of Serbia on Inflation Targeting , adopted in the session of the Government of the Republic of Serbia of 19 December 2008.

Main principles of the inflation targeting regime

The inflation target, defined in terms of the annual percentage change in the consumer price index, is the only numerical guideline for the monetary policy implemented by the National Bank of Serbia. The National Bank of Serbia will also support the implementation of the economic policy of the Government if this does not threaten the achievement of the inflation target or the stability of the financial system.

The National Bank of Serbia will achieve the inflation target by changing the interest rate applied in the conduct of its main monetary policy operations (currently, the interest rate on one-week repo operations). This interest rate will be its main monetary policy instrument. Other monetary policy instruments will have supporting roles, as they should contribute to a smooth transmission of the key policy rate to the market and balanced development of financial markets without threatening the stability of the financial system.

The National Bank of Serbia will pursue a managed floating exchange rate regime, which means that the National Bank of Serbia will have the right to intervene in order to limit excessive daily oscillations in the foreign exchange market, contain threats to financial and price stability and safeguard an adequate level of foreign exchange reserves.

The National Bank of Serbia will continue enhancing the transparency of its monetary policy and upgrading efficient communication with the public. The Executive Board will take decisions on the monetary policy on pre-announced dates and will regularly inform the public about the achievement of the set inflation targets and measures taken in order to meet these targets in the future.

Operational guidelines for inflation targeting

Setting inflation targets

Inflation target is set by the NBS, in cooperation with the Government, based on the analysis of current and expected macroeconomic movements and the medium-term plan of changes in prices under direct or indirect regulation of the Government.

Inflation targets are set in advance in order to define the medium-term framework for monetary policy decision-making and to anchor inflation expectations. In the case of Serbia, inflation target is set for three years ahead until the process of nominal, real, and structural convergence to the EU is finished. As the process is ongoing, inflation target is slightly above the quantitative definition of price stability and the inflation target level in developed countries (2.0% or 2.5%). At end-2019, inflation target was set at 3.0% until December 2022, with a tolerance band of ± 1.5 pp (National Bank of Serbia’s Memorandum on Inflation Targets until 2022 was adopted at the meeting of the NBS Executive Board of 12 December 2019).

Measured as the annual percentage change in the Consumer Price Index, inflation target is set as a point value with a tolerance band. Inflation target is a precise and clear signal to the public of the inflation level that the central bank is trying to achieve. Also, the target is symmetrical which facilitates the central bank’s communication with the public in case of not only overshooting, but also undershooting the target.

The target tolerance band (± 1.5) indicates the acceptable room for inflation movements, taking into account that many temporary small-scale shocks can cause short-term volatility of inflation rate, without requiring a monetary policy response. It also reflects the commitment of the NBS to stabilise economic activity as it creates room for monetary policy flexibility without jeopardising its credibility.

Achieving inflation targets

The NBS strives to achieve the targeted rate of inflation by changing its key policy rate, i.e. the interest rate applied in the main open market operations. This interest rate is the key monetary policy instrument and the decisions on its level are based on the analysis of economic circumstances, assessment of future developments and the medium-term inflation projection. In setting the key policy rate, it is important to consider the lag effect, i.e. period between the moment when the rate is set and the moment when the effects on the ultimate goal, that is inflation, are felt, which in the case of Serbia is around one year.

Other monetary policy instruments play a supporting role – they contribute to the smooth transmission of the impact of the key policy rate on the market, as well as to the development of the financial market, without jeopardising financial stability.

The inflation target is a medium-term goal, which means that inflation can deviate from the target in the short term due to exogenous shocks. The NBS will allow temporary deviations from the target if bringing inflation back to the target in the short term warrants monetary changes that would cause disruptions to macroeconomic processes.

Communicating the achievement of inflation targets:  monetary policy transparency and accountability

Accountable and transparent in its operations, the NBS:

  • publishes press releases from the meetings of the Executive Board on the same day the meeting is held;
  • organises Governor’s press conferences as needed, to elaborate on the rationale behind the Executive Board’s decisions and to answer any questions the public may have;
  • publishes the quarterly Inflation Reports, as the main tool of communication with the general public regarding economic developments underlying the Executive Board’s decisions and activities of the central bank.

Coordination of monetary, fiscal and income policies

In an inflation targeting regime, the coordination of monetary and fiscal policies is of key importance.  Pursuant to the Agreement on Inflation Targeting, the Government has committed to pursuing a sustainable and predictable fiscal policy consistent with inflation targets.