Key policy rate kept on hold, average repo rate raised to 0.24%

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

The rates on deposit and lending facilities also remained unchanged (0.10% and 1.90%, respectively). However, the first measure to tighten monetary conditions was undertaken – at yesterday’s reverse repo auction, the average repo rate was raised by 13 bp to 0.24%.

In its decision-making, the Executive Board was guided by the fact that the higher level of inflation compared to the start of the year, similarly to other countries, is largely due to last year’s low base and supply-side factors that monetary policy cannot affect. The factors include primarily the rising global prices of oil and other primary commodities over the past months, which, along with halts in global supply chains, generated stronger cost-push pressures globally and at home. Moreover, since April the domestic market has experienced a more pronounced rise in vegetable prices due to the drought, pushing inflation to 4.3% y-o-y in August. That these are mainly supply-side pressures is suggested by the continued low and stable core inflation (1.8% y-o-y in August) and short- and medium-term inflation expectations, which the financial and corporate sectors place at around the target midpoint.

The Executive Board expects that y-o-y inflation will most probably trend higher in the next several months than in August and, similarly to other neighbouring countries, above the upper bound of the target corridor. With the waning of the effect of this year’s rise in global primary commodity prices and cost-push pressures in production and transport in H2 2022, inflation is expected first to return within the target band and then go below the midpoint.

As stated by the Board, in line with the announced readiness to respond even between two Board meetings, the NBS began to adjust monetary conditions to current and expected monetary trends. In the period from the previous meeting, the NBS exercised a proactive approach and undertook several measures to maintain monetary stability:

  • It made the decision to terminate repo securities purchase auctions as of October, through which banks were provided with three-month dinar liquidity under highly favourable conditions (0.10%).
  • At yesterday’s first reverse repo auction in October, it raised the average executive repo rate by 13 bp – from 0.11% (on average since the start of the year) to 0.24%.

Monetary conditions were thus tightened without changing the key policy rate and the interest rate corridor. The NBS effectively exercised a flexible approach to monetary policy conduct, as it announced and as allowed by the monetary framework.

As so far, the NBS will keep a close eye on developments in the domestic and international environment, ready to respond, if needed, by all monetary policy instruments on hand, with a view to maintaining monetary and financial stability.

Having analysed economic activity indicators, the Executive Board stressed that GDP exceeded the pre-crisis level already in Q1 this year as a result of the concurrent growth in economic activity and potential output, and that available indicators for Q3 are supportive of the 6.5% GDP growth forecast for this year, with a possibility of an even higher outcome. Positive trends are strongly underpinned by the effects of past monetary and fiscal policy measures and the consequently preserved investment and consumer confidence, production capacities and jobs. The Executive Board therefore expects that the largest contribution to GDP growth at the year level will come from fixed investment and personal consumption. A positive impulse is also expected from net exports, owing to faster growth in export than in import of goods and services. Further expansion of export capacities, spurred by high FDI inflows, will continue to work towards improving the country’s external position, and so will the expected global economic recovery. In terms of medium-term economic growth, the Board was mindful of the fact that the NBS projection was recently raised from 4% to the 4–5% range, in light of the announced numerous infrastructure projects and their direct and indirect effects on GDP.

Though movements in the international environment still greatly hinge on the course of the pandemic, global economic recovery is picking up the pace thanks to vaccine rollout and the economic policy support of leading economies. New virus strains still pose a risk to global growth, as do occasional halts in supply chains and imbalances in the labour market since they ramp up production costs. Economic activity indicators of the euro area, our key economic partner, have stayed in the positive territory, supported by the rise in new orders driven by stronger demand despite persistent halts in global production chains. While the ECB is not likely to raise its interest rates any time soon, the accelerated euro area growth and higher inflation since the beginning of the year fuel expectations that it might consider changes to its asset purchase programme in December. The Fed is not likely to raise its interest rates this year either, while the rate hike next year remains uncertain as well. Nevertheless, the Fed might decide in November to downsize its asset purchases within the quantitative easing programme, which could dampen capital inflows to emerging markets, Serbia included, and therefore calls for increased caution in monetary policy conduct. The Executive Board also took into account that oil and other primary commodity prices remain significantly volatile and dependent on a number of supply- and demand-side factors, as well as that their growth persisted through September.  

Delivering price and financial stability will remain a priority of the monetary policy, together with supporting faster growth of our economy and employment, a further rise in the export sector, as well as a favourable investment environment.

The next rate-setting meeting is scheduled for 9 November 2021.

Governor’s Office