After considering current macroeconomic trends and the overall outlook at its meeting today, the NBS Executive Board decided to keep the key policy rate at 1.25%.
In making the above decision, the Executive Board was guided primarily by the achieved and expected effects of past monetary policy measures aimed at mitigating the negative impact of the pandemic and encouraging economic growth. The Executive Board highlighted that the results recorded in most production and service activities have exceeded expectations for the fourth month in a row. It is quite certain that the GDP outcome in 2020 as a whole will be better than the initially projected -1.5%. Under the new projection, the GDP drop will measure around 1% with risks tilted to the upside, and this will be one of the best outcomes in Europe. Industry and retail trade have already reached pre-crisis levels and exports are on the path of normalisation. The revised GDP projection for 2020 also reflects improved performance of construction and agriculture. Favourable prospects are further confirmed by the FDI inflow, which remained solid in the face of the pandemic and the economic slowdown of our key foreign trade partners and more than sufficient to cover the current account deficit. A speedy recovery of our economy best speaks of the adequacy of the coordinated measures and activities taken by the NBS, the Government and the President of Serbia, owing to which we have maintained production capacities and employment, while precluding a sharper drop in business and consumer confidence. The Executive Board expects that past monetary policy easing will continue to support favourable financing conditions for corporates and households and contribute to the increase in their disposable income. This will encourage further growth in domestic demand and, along with the gradual rebound in external demand, push Serbia’s economic activity above the pre-crisis level already in the first half of the next year.
As emphasised by the Executive Board, the adoption of the said incentive measures was possible owing to low and stable inflation, underpinned primarily by the relative stability of the exchange rate and the market being amply supplied even in the crisis, and by the anchored inflation expectations. Inflation was stable in August, at 1.9% y-o-y, and will continue to move around this level in the coming months. Its gradual approach to the target midpoint is expected in the medium run as demand recovers, supported by monetary and fiscal policy measures.
Though the global economy is gradually recovering, partly owing to monetary policy measures of leading central banks and fiscal packages, the prospects still largely depend on the course of the pandemic. The recovery of the euro area, our most important trade and financial partner, is currently unfolding above expectations, reflecting, among other things, the ECB stimulus. Trends in the international commodity and financial markets remain volatile, mirroring the pandemic-related uncertainty and global geopolitical tensions.
The Executive Board also highlights our economy’s increased resilience to external shocks, which is a result of responsible conduct of economic policy in the past years and our adequate response to the current global crisis. Serbia preserved its credit rating even during the pandemic, which is a clear recognition of the Government and NBS’s success in preserving macroeconomic and financial stability of the country and a favourable economic outlook.
The next rate-setting meeting will be held on 12 November.