09/07/2020
At its meeting today, the NBS Executive Board kept the key policy rate on hold, at 1.25%.
The decision was made in light of the expected effects of monetary policy measures undertaken to mitigate the impact of the COVID-19 pandemic. In an environment of high banking sector liquidity, the past key policy rate cuts – to the lowest levels in the inflation targeting regime, will continue to influence trends in the financial and real sectors and contribute to preserving the favourable terms of financing of businesses and households and to the increase in their disposable income. The Board also had in mind the expected effects of the robust fiscal package (around 11% of GDP), which ensured support to the private sector, in order to encourage the fastest possible recovery of our economy from the pandemic. The Board underscores the NBS is prepared to respond as potential new pandemic shocks emerge in the domestic and international environment.
As emphasized by the Board, the adoption of the stimulus measures was made possible thanks to low and stable inflation. In line with NBS expectations, inflation slowed since early 2020 – to 0.7% y-o-y in May, reflecting mainly the high base effect for vegetable prices and lower current petroleum product prices as global oil prices plummeted. Inflation is likely to move around the lower bound of the target tolerance band in the rest of the year, amid dented aggregate demand and lower import prices. It is expected to gradually approach the target in the medium run, owing to the recovery of demand, supported by monetary and fiscal policy measures.
The external environment continues to be plagued by uncertainty, notably with regard to the global recovery from the effects of the pandemic and developments in the international financial and commodity markets. Many central banks worldwide reacted by easing their monetary policies, taking conventional and unconventional measures, to mitigate the fallout from the crisis. The recovery of the euro area, Serbia’s key trade and financial partner, should be encouraged by the ECB’s measures geared at boosting liquidity and supporting favourable terms of financing. In keeping the key policy rate unchanged, the Executive Board was also guided by uncertainty in the commodity markets, above all the uncertain outlook for global primary commodity prices, notably the price of oil, which exhibited considerable volatility in recent months, and began rising as of May.
The Executive Board underlined the fact that Serbia faced this global crisis in a much better position than earlier crises, which enabled the adoption of monetary and fiscal measures that will significantly alleviate the effects of the crisis on the domestic economy. It is almost certain that the major negative effects of the pandemic in Serbia played out in April and that in the coming months we will see a recovery, encouraged by the measures taken, leading to the GDP growth of minimum 6% in 2021. This is also confirmed by the economic and external trade activity indicators for May, which point to a recovery relative to April, as well as by the leading indicators of economic expectations for June, for both Serbia and the euro area.
The Executive Board stressed that monetary and fiscal policy measures will remain fully coordinated, which will help moderate any potential further negative effects from the external environment. The NBS will continue to keep a close eye on global developments and their impact on the domestic economy and inflation, and will respond timely in order to preserve the achieved price and financial stability and contribute to the sustainable growth of our economy.
The next rate-setting meeting will be held on 13 August.
Governor’s Office
