Key policy rate raised to 3%

At its meeting today, the NBS Executive Board voted to raise the key policy rate by 25 bp to 3%. At the same time, the lending facility rate now equals  4% and the deposit facility rate 2%, meaning that the entire interest rates corridor was increased by 25 bp.

In making such decision, the Executive Board maintains the continuity of moderate monetary policy tightening, whereby it adequately responds to heightened inflationary pressures without jeopardising further growth in economic activity.

The Executive Board estimated that against the backdrop of prolonged cost-push pressures, as well as imported inflation rising beyond expectations, monetary conditions at home need to be tightened further. Thus the NBS seeks to limit the second-round effects on inflation expectations and make sure that inflation in Serbia strikes a downward trajectory, as well as that it returns within the target tolerance band until the end of the projection horizon. As of October 2021, the NBS has gradually and continuously tightened monetary conditions at home by using different tools, depending on the estimated character of inflationary pressures. In addition to lifting main interest rates and tightening dinar liquidity conditions, the NBS significantly contributes to limiting the effects of the spillover of imported price growth onto domestic prices by maintaining the relative stability of the RSD/EUR exchange rate.

When making the decision, the Executive Board was aware that geopolitical developments and escalation of the conflict in Ukraine are reflected on further growth in global inflation through high prices of energy and food, as well as the still present halts in global supply chains. Against such backdrop, a number of central banks opted for revising their inflation projections up, noting that risks that inflation might be higher and more durable than expected are still more pronounced. Therefore many central banks, including the most influential ones – the Federal Reserve System and the European Central Bank – have tightened their monetary policies over the previous months faster than expected. These factors may result in more unfavourable global growth prospects, which would also increase volatility in the international financial market and channel global capital flows from developing countries towards advanced economies.

Energy prices in the global market and imported inflation continued on the upward path. This, coupled with the effects of the drought not only at home, but also in a major part of Europe reflecting on further food price hike, resulted in a somewhat higher inflation in the domestic market than expected. Serbia’s y-o-y inflation in June stood at 11.9%, of which around 70% is still attributable to food and energy price growth. Higher imported inflation also translated into higher core inflation (headline inflation excluding the prices of food, energy, alcohol and cigarettes), which measured 6.7% y-o-y in June. It must be noted that core inflation is still significantly lower than headline, but also lower than core inflation in countries of the region pursuing the same monetary policy regime. In addition to the preserved relative stability of the exchange rate, important factors behind lower core inflation are medium-term inflation expectations of the financial sector which continued to move within the NBS target band.

Under the August projection, y-o-y inflation will most likely peak during this quarter and then strike a downward trajectory. The factors that will work toward easing inflationary pressures include past monetary tightening, the expected weakening of global factors that drove food and energy prices up in the prior period, as well as lower external demand amid unfavourable global growth prospects. Government economic measures aimed at capping the prices of basic foodstuffs and energy in the domestic market will also work towards alleviating inflationary pressures in the short run.

As estimated by the SORS, after relatively strong GDP growth of 4.4% y-o-y in Q1, a similar pace of growth was maintained in Q2 (4% y-o-y). Despite deteriorating growth outlook for the euro area, Serbia’s manufacturing output and exports continued up, indicating that the weakening of external demand has not had any major negative effects on Serbia thus far. This is thanks to investment in tradable sectors from earlier years, which considerably increased our export supply. Furthermore, agricultural exports have gathered pace since May following the relaxation of measures that temporarily restricted the export of these products. Having this in mind, and despite mounting risks that the euro area would slip into recession in H2, the NBS still expects our GDP to grow 3.5–4.5% this year. The Executive Board judges that the ongoing tightening of monetary conditions at home will not have any major negative effects on economic developments.

Depending on global geopolitical situation and the movement of key monetary and macroeconomic factors in the domestic and international environment going forward, the NBS will assess whether there is a need for additional tightening of monetary conditions. Delivering price and financial stability in the medium term remains the NBS’s monetary policy priority, while supporting further economic growth and development, a further rise in employment and a favourable investment environment.

At today’s meeting, the Executive Board also adopted the August Inflation Report, featuring the latest macroeconomic projections that will be presented to the public in more detail at a press conference scheduled for 17 August.

The next rate-setting meeting of the NBS Executive Board will take place on 8 September.

Governer's Office