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 Executive Board, the effects of past monetary and fiscal measures, including the third economic assistance package worth around 4.3% of GDP, can also be expected going forward, helping maintain the favourable financing conditions for corporates and households, and thus propping up their disposable income.

The Board stressed that Serbia is one of the few economies that exceeded pre-crisis levels of economic activity already in Q1. Particularly important is the fact that well-coordinated monetary and fiscal policies managed to preserve production capacities and jobs, as well as consumer and business confidence. Having this and the successful vaccination process in mind, the Board expects that the economic growth this year will be driven mainly by the higher fixed investment and consumption. External demand is on the path of recovery and Serbian exports – diversified by product and geography, are rising further, supported by the continued strong inflow of FDI.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.

Consistent with Executive Board expectations, y-o-y inflation rose in May (to 3.6%), just as it did in most other countries, notably as a result of last year’s low base. The low base effect is associated primarily with petroleum product prices which recorded a sharp decline in the months following the outbreak of the pandemic due to the collapse of the global oil price. The Executive Board expects inflation to move around the target midpoint (3%) in the coming months, and to slow down as of Q2 next year when the effect of temporary factors relating to petroleum product and food prices wears off. The absence of any major inflationary pressures is signalled by the stable movement of core inflation, which measured 2.0% y-o-y in May. 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 making the decision to keep the key policy rate unchanged, the Executive Board was aware of the fact that developments in the international environment are still largely dependent on the course of the pandemic. Though economic recovery remains uneven across countries, with a risk that it might undergo a slowdown due to new virus strains, the global economy’s medium-term outlook is favourable thanks to the vaccination process. Potential risks to global economic growth may include disruptions in value chains and imbalances in the labour market, as they increase production costs and lead to global concerns that inflationary pressures might rise. Leading economic activity indicators in the euro area, our key foreign trade partner, suggest that recovery in Q2 is robust, driven by growth in manufacturing, as well as in the services sector. For the time being, accelerated growth in the euro area, coupled with higher inflation from the start of the year, is not driving the ECB towards a decision to reduce the level of monetary policy accommodation, because higher inflation factors are assessed as temporary. Also, the Fed believes that developments in the US economy still do not call for the withdrawal of central bank’s support measures. Good prospects for global economic growth and announcements by leading central banks that their rates will remain low going forward have alleviated uncertainty in the international financial markets to some degree, therefore financing conditions for emerging countries are still favourable. Uncertainty persists in the global commodity market, notably in terms of movements in the global oil price, which went up by more than 45% in the first half of the year. The increase in the global price of oil was under the impact of a strong surge in demand which exceeded the supply, due to it being limited by decisions of OPEC+ countries. An upward trend is also recorded by global prices of other primary commodities, as well as food prices.

In conditions of pronounced global uncertainty caused by the pandemic, the NBS preserved price and financial stability for the eighth year in a row, and at the same time it is on an equal footing with the Serbian Government in providing support to corporates and households. The Executive Board underlined that safeguarding price and financial stability will remain a priority of the monetary policy, together with support to faster growth of our economy and employment, further rise in the export sector, as well as 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 12 August 2021.

Governor's Office