Key policy rate remains unchanged

At its meeting today, the NBS Executive Board voted to keep the key policy rate at 1.0%.

As assessed by the Board, the effects of past monetary and fiscal measures can also be expected going forward, helping maintain the favourable financing conditions of businesses and households, and propping up their disposable income. An impetus will also come from the adopted third stimulus package this year, worth around 4.3% of GDP.

The Executive Board pointed to the strong GDP growth since the beginning of the year which outperformed expectations, but also preliminary estimates – according to SORS data, it came at 1.7% y-o-y in Q1, which is more than the preliminary estimate of 1.2%. On the production side, robust growth was powered the most by construction and industry, and on the expenditure side, by fixed investments and net exports. The remarkably high y-o-y growth rates posted by industrial production (33.9%), commodity exports and imports (73.2% and 63.6%, respectively) and service sector indicators in April are partly attributable to the low base from April 2020, when the economic effects of the pandemic were at their highest in Serbia and worldwide, but also to the continuation of positive trends since the start of the year, as these indicators recorded m-o-m increases as well. The Board expects that the economic growth will continue in the period ahead, largely as a result of the coordinated monetary and fiscal policy measures which preserved investment and consumer confidence and propped up fixed investment and consumption growth. Accelerated recovery will be also underpinned by the progress in the vaccination process and its beneficial impact on the revival of many activities within the services sector. There is no doubt that external demand will recover, driving up our exports that will continue to be diversified by geography and product. All of this, along with the planned increase in government capital expenditure for infrastructure projects, will drive GDP growth in 2021 as a whole to 6%, or possibly higher.

The absence of the seasonally typical vegetable price growth early in the year was compensated for in April, which, coupled with the low base effect for petroleum product prices, pushed inflation in April to 2.8% y-o-y. The Executive Board expects a somewhat higher inflation rate in May too. However, this inflation rise is temporary and reflects primarily the low 2020 base, above all for petroleum products, which is also the case in most other countries due to last year’s pandemic-related collapse of global oil prices. At the same time, low core inflation of 1.8% signals the absence of any major demand-side inflationary pressures and the Executive Board expects that its stable movement around the current level will persist in the period ahead. The ensured relative stability of the exchange rate remains an important factor of low and stable inflation, as do the anchored inflation expectations of the financial and corporate sectors, which confirm monetary policy credibility.

In keeping the rate on hold, the Executive Board had in mind that the movements in the international environment still largely hinge on the course of the pandemic. While global growth prospects are better than anticipated, the recovery will be uneven across countries and largely dependent on the vaccine rollout and economic policy support. The expected acceleration of euro area growth and the pick-up in inflation since the beginning of the year have not, for the time being, softened the stimulus measures of the ECB, because the factors behind higher inflation rates are assessed to be temporary in nature. The Fed is not raising its interest rates yet either, even though the pace of economic recovery, fuelled by the exceptionally accommodative fiscal policy, has sparked long-term inflation expectations and interest rates. Better growth outlook for the global economy and the announcements of leading central banks that their interest rates would stay low going forward, have to some extent mitigated uncertainty in the international financial market, so financing conditions for emerging economies remain favourable. Uncertainty persists in the global commodity markets, notably the market of oil, primary agricultural products and food, but no major further growth in their prices is expected.

The Executive Board stresses that, as so far, monetary policy priority will be to ensure price and financial stability, while supporting faster growth of our economy and employment, further growth of the export sector and a favourable investment environment. The NBS will continue to carefully monitor the trends and impact of the key factors in the domestic and international environment on inflation, financial stability and the speed of economic recovery, and to adjust its measures accordingly, in the interest of our corporates and citizens.

The next rate-setting meeting will take place on 8 July.

Governor's Office