08/09/2022
At its meeting today, the NBS Executive Board voted to raise the key policy rate by 50 bp to 3.5%. The rates on deposit and credit facilities were raised by the same amount – to 2.5% and 4.5%, respectively.
The Executive Board continued to tighten monetary conditions, adequately responding to stepped-up inflationary pressures, without prejudice to further economic growth.
As assessed by the Board, in an environment of continued cost-push pressures and soaring imported inflation, it is necessary to continue to tighten monetary conditions at home. By making such decision, the NBS will contribute to inflation hitting a downward trajectory and returning within the target tolerance band until the end of the projection horizon. This also helps contain the second-round effects of rising food and energy prices on other prices through inflation expectations. Since October last year, the NBS has been gradually, but continuously tightening monetary conditions in the domestic market. In addition to raising the main policy rates and tightening the conditions of dinar liquidity, the NBS contributes to medium-term price stability also by maintaining the relative stability of the dinar exchange rate against the euro, by containing the spillover effect of rising imported prices on domestic prices.
In making the decision, the Executive Board had in mind that geopolitical events and the escalation of the Ukraine conflict led to global energy and primary commodity prices moving at their highest levels in H1 2022, pushing global inflation further up. This is why over the past months many central banks, including the most influential ones – the Fed and the ECB, were tightening their monetary policies at a faster than expected pace. Over the past weeks, the leading central banks have been sending clear signals concerning a decisive fight against inflation and are announcing further tightening of their monetary policies. The above factors may cloud the global growth outlook and trigger higher volatility in the international financial market and the shift of global capital flows from emerging to advanced economies. Though the global prices of oil and other primary commodities have been falling over the past two months due to elevated recessionary pressures globally, they are still at significantly higher levels than one year ago, while the prices of natural gas and electricity in the European market even touched new record highs in August.
A considerable upswing in global energy prices and relatively high imported inflation, along with effects of drought at home and in major part of Europe, driving food prices further up, led to a continued rise of Serbian inflation. Y-o-y inflation in July stood at 12.8%, as around 70% of contributions again stemmed from food and energy prices. The rise in imported inflation reflected also on an increase in core inflation (headline inflation excluding prices of food, energy, alcohol and cigarettes), which measured 7.5% y-o-y in July. It is important to note that core inflation remains much lower than headline inflation, as well as than core inflation experienced by regional peers running the same monetary policy regime. The lower core inflation continues to be underpinned by the preserved relative stability of the exchange rate in extremely uncertain global conditions and the anchored medium-term inflation expectations of the financial sector, moving within the bounds of the target.
According to the August projection of the NBS Executive Board, y-o-y inflation is likely to peak during the current quarter, only to turn downward thereafter. A soothing effect on inflationary pressures will come from the past monetary policy easing, the expected weakening of the effects of global factors which fuelled energy and food price growth in the past period, as well as the lower external demand amid the unfavourable global growth outlook. In the short run, inflationary pressures will also be calmed by the adopted government measures capping the energy and food price growth in the domestic market.
Despite the contraction in external demand amid the tightening of geopolitical tensions, the first half of the year saw the maintenance of a relatively high GDP growth rate, at 4.1% y-o-y. The main contributors were investments in tradeable sectors in the past years, which increased the production and exports of the manufacturing industry, as well as triggered further growth in employment and wages, coupled with a drop in unemployment, which reflected in higher personal consumption and increased activity in services on that account. In conditions of strengthening recession pressures in the euro area, we expect Serbia’s economic growth to slow down in the remainder of this and beginning of the next year, so that under the baseline scenario it should range between 3.5 and 4.5% in 2022 and 2023, though facing risks more heightened than usual and tilted to the downside.
Depending on the global geopolitical situation and movement in key monetary and macroeconomic factors from the domestic and international environment in the period ahead, the NBS will assess if there is a need for further monetary tightening. The maintenance of price and financial stability remains the monetary policy priority in the medium term, with support to future economic growth.
The next rate setting meeting will be held on 6 October.
Governor’s Office
