At its meeting today, the NBS Executive Board voted to cut the key policy rate further to 1.5%, in order to alleviate the negative effects of the coronavirus (Covid-19) on economic activity, while at the same time ensuring that inflation remains within the bounds of the target in the medium term. The Executive Board’s decision on further monetary policy accommodation is based primarily on the fact that indicators from the international environment signal that the negative effects of the virus on global economic growth are stronger than expected, which has also reflected on developments in the international commodity and financial markets and the decisions of central banks and governments of countries worldwide.
The Executive Board highlights that Serbia faced this crisis in a much more favourable position, with a growth rate of over 4%, low and stable inflation for seven years in a row, eliminated fiscal imbalance and a much reduced external imbalance, and foreign exchange reserves at their highest level on record, which created space for further monetary and fiscal policy easing during the crisis period, without threatening macroeconomic stability.
In making this decision, the Executive Board also took into account the previous monetary policy measures taken to alleviate the negative effects of the spread of the coronavirus – trimming of the key policy rate by 50 basis points in March, narrowing of the corridor of its main interest rates, from ±1.25 pp to ±1 pp relative to the key policy rate, and the provision of additional liquidity to banks through repo purchase of dinar government securities and FX swap purchase operations. In addition, direct support to the private sector also came from a coordinated reaction of the Government of the Republic of Serbia and the NBS through the decision on the moratorium on loan repayment during the state of emergency for at least 90 days and the fiscal assistance package for businesses and citizens.
The Executive Board underlines that monetary and fiscal policy measures aimed at supporting economic growth are feasible in conditions of low and stable inflation, which according to the latest available data measured 1.9% y-o-y in February. Inflationary pressures are expected to remain low in the period ahead, with somewhat more prominent risks of inflation trending even below the medium-term projection from February, mainly on account of a significant drop in oil prices and lower aggregate demand as a consequence of the pandemic, which will be alleviated in part by the implemented monetary and fiscal policy measures.
The coronavirus spread has significantly deteriorated the global economic growth outlook, causing major downward revisions to growth projections for this year for leading economies and emerging markets alike. Economic contraction was caused by the aggravated and discontinued work in many service sectors, and in some cases also disruption of global value chains, and the fall in consumer and business confidence. In such conditions, uncertainty in the international financial market has increased and investors favour safe assets, causing a downspin in global stock exchange indices and a rise in the price of gold and government securities of developed countries. Dented global growth prospects reflected also on the falling global prices of primary commodities, notably oil.
To moderate the negative effects of the crisis, many central banks reacted by easing their monetary policies further. The Fed lowered the target range for the federal funds rate to near zero and announced a quantitative easing programme that has neither time nor amount limits, while the ECB, pursuing a zero interest rate policy for some time already, increased the volume of its asset purchases. At the same time, governments worldwide unleashed massive fiscal stimuli. Coordinated moves of monetary and fiscal policy should contribute to alleviating the negative impact on economic growth and to maintaining favourable terms of financing in the new situation.
The Executive Board underlines that the data on the movement of economic activity indicators and the sources of its financing in the domestic market in the first two months of the year were favourable, many even outperforming the NBS’s expectations. It was in the second half of March that economic activity contracted under the impact of lower external demand, but also aggravated business conditions in many sectors. After contracting in Q2, economic activity is expected to recover in the remainder of the year, the pace of the recovery depending on the length of the pandemic. In the best collective judgement of the Executive Board, our medium-term economic growth prospects remain favourable, as the negative effects of the crisis on economic activity in the short term should be mitigated by the adopted monetary and fiscal policy measures.
The Executive Board emphasises that monetary and fiscal policy measures will continue to be fully coordinated, which will help ease potential further negative effects from the international environment and the consequences of the spread of the coronavirus. As so far, the NBS will closely monitor global developments and assess their implications for the domestic economy and inflation and will respond timely in order to preserve the achieved price and financial stability and contribute to the country’s sustainable economic growth.
The next rate-setting meeting will be held on 7 May.