10/09/2020

Key policy rate kept on hold

At its meeting today, the NBS Executive Board voted to keep the key policy rate at 1.25%.

In making the decision, the Board was guided by the achieved and expected effects of monetary policy measures adopted to mitigate the negative impact of the pandemic and encourage economic growth. The Board expects that past monetary policy easing and primarily the key policy rate cut by 1 pp from the pre-crisis level will continue to contribute to the preservation of favourable conditions of financing for businesses and citizens and to a further rise in their disposable income.

Consistent with the Executive Board’s expectations, our economy began to recover in May, at a faster than expected pace in most production and service sectors. According to the SORS estimate, in H1 the economy contracted by around 0.8% y-o-y, which is a better outturn than initially expected. As highlighted by the Board, such performance reflects Serbia’s much better macroeconomic position in the current global crisis compared to the earlier crises. This opened room for robust monetary and fiscal measures and potential future measures if necessary, without jeopardising price and financial stability, and the country’s fiscal position. The Board expects the incipient recovery to continue, with economic growth exceeding pre-crisis levels already next year.

Faster recovery will also be supported by the NBS stimulus – a two-month extension of the moratorium on the repayment of loan and lease debt, more favourable conditions of dinar financing for businesses within the Government’s Guarantee Scheme, and facilitated housing loan approval and repayment of housing and other loans. The Executive Board also took into account the expected effects of the robust package of fiscal measures (over 12% of GDP), which are a strong support to the private sector and will accelerate the recovery.

The Executive Board stresses that the adoption of the above stimuli was possible owing to the environment of low and stable inflation, underpinned primarily by the relative stability of the exchange rate and a market fully supplied with goods even in crisis conditions, as well as by the anchored inflation expectations.  Y-o-y inflation measured 2% in July and is likely to revolve around this level in the coming months. It is expected to gradually approach the target midpoint in the medium run, driven by the recovery of demand, supported by monetary and fiscal policy measures.

At the global level, after a sharp contraction in economic activity in Q2 caused by the coronavirus pandemic, we can see a gradual relaxation of containment measures and a nascent recovery, supported in many countries also by accommodative monetary and fiscal policy measures.  Though developments in the international environment remain surrounded by a high degree of uncertainty, economic activity indicators suggest that the global economy has entered recovery as of June, and that some countries, including the euro area as our key trade partner, are rallying faster than initially anticipated. Developments in the international commodity and financial markets remain volatile, reflecting uncertainties over the course of the pandemic and economic tensions between the United States and China.

The next rate-setting meeting is scheduled for 8 October.

Governor's Office