11/05/2023
At its meeting today, the NBS Executive Board voted to keep the key policy rate at 6.00%. The rates on deposit and lending facilities were also kept unchanged, at 4.75% and 7.25%, respectively.
The Executive Board holds that the full-fledged effects of past monetary measures should be considered after the tightening of monetary conditions, on which the NBS embarked in October 2021 (first by raising the weighted average rate in reverse repo auctions, and since April 2022 by continuous key policy rate hikes – by a total of 500 bp). The pass-through of past increases in the key policy rate to interest rates in the money, loan and savings markets indicates the efficiency of the monetary policy transmission mechanism through the interest rate channel. By safeguarding relative stability of the dinar exchange rate against the euro, the NBS also continuously contributes to the easing of inflationary pressures. The Executive Board‘s decision is consistent with the expectation that inflationary pressures would start to subside in the coming months, more substantially so as of the middle of this year. The NBS retains the option to continue monetary tightening going forward if so required by movements in the domestic and international environment. There is room to tighten monetary conditions also by adjusting the weighted average repo rate and by further raising the policy rate, depending on the nature of potential pressures. Hence, the NBS once again underscores the importance of the flexibility of its monetary framework.
The Executive Board’s decision to keep the key policy rate unchanged was adopted in conditions of gradual weakening of cost-push pressures from the international environment and easing of disruptions to global supply chains. Prices in global energy markets also went down, primarily those of electricity and natural gas. This will dampen cost-push pressures globally and should also contribute to the slowing of domestic inflation in the coming period. Further, in conditions of global slackening of economic activity, primarily manufacturing in the euro area, our key trade partner, it is necessary to also ensure the continuity of our economic growth. At the same time, by maintaining relative stability of the dinar exchange rate against the euro, the NBS significantly helps to contain the spill-over effect of rising foreign prices on domestic prices and to preserve macroeconomic stability against the background of pronounced global uncertainty. The Board underlines that monetary policy caution should be maintained going forward due to the still present risks – geopolitical tensions and the price dynamics and future availability of primary commodities and energy. Uncertainty also continues to stem from the still relatively high core inflation in a number of countries, underpinned by labour market factors, as well as from the future monetary policy decisions of leading central banks and hence, conditions in the international financial market and their impact on capital flows to emerging economies. It is therefore possible that the period of elevated interest rates will last somewhat longer than initially anticipated.
As expected by the Board, inflation in Serbia stayed at around 16% y-o-y in Q1, due to the pass-through of high-cost push pressures from the prior period. Such inflation movements were dictated by the increased contribution of food prices and the expected adjustment of administered prices, while a lower contribution of petroleum products worked in the opposite direction. As before, core inflation (CPI excluding food, energy, alcohol and cigarettes) stayed considerably lower than headline inflation and amounted to around 11% y-o-y in Q1, supported by the preserved stability of the exchange rate of the dinar against the euro. Under the latest projections, inflation will strike a downward path from April and record a sharper fall in H2, ending the year at half the March level and returning within the target tolerance band in mid-2024. Inflation will fall primarily on the back of monetary tightening, the waning of the effects of global factors that drove the energy and food price growth in the prior period, and the slowing of imported inflation.
As regards economic activity, the NBS maintains its real GDP growth projection for this year in the range of 2–3%, supported by the significantly better than expected foreign trade movements since the start of the year. As of 2024, GDP growth should accelerate to 3.0–4.0% and in the following years return to the pre-pandemic growth trajectory of around 4.0% p.a. on the back of the global economic recovery and, hence, recovery in external demand from H2 2023, and the planned implementation of investment projects, notably in road, railway, energy and utility infrastructure.
Depending on movements of key monetary and macroeconomic factors at home and abroad, as well as the global geopolitical situation, the NBS will assess whether there is a need to tighten monetary conditions further and to what extent, taking into account the expected effects of past monetary tightening on the future inflation profile. Delivering price and financial stability in the medium term remains the NBS’s monetary policy priority, while supporting further economic growth.
At today’s meeting, the Executive Board adopted the May Inflation Report with the latest macroeconomic projections that will be presented to the public in detail at a press conference on 17 May.
The next rate-setting meeting will take place on 8 June.
Governor's Office
