06/10/2023
At its meeting today, the NBS Executive Board voted to keep the key policy rate on hold, at 6.50%. Interest rates on deposit (5.25%) and credit facilities (7.75%) were also kept unchanged.
The Board’s decision is underpinned by the continued easing of global inflationary pressures and the established downward path of domestic inflation and its expected return within the target tolerance band over the monetary policy horizon. The Board also took into account the fact that monetary conditions were tightened in the previous period through the main instrument – the interest rate, and in September also by increasing the reserve requirement ratio, with the full effects of these measures yet to be played out. The transmission of past monetary tightening onto interest rates in the money, lending and savings markets signals the efficiency of the monetary policy transmission mechanism.
In making the decision, the Executive Board had in mind that headline inflation is falling in the international environment, although the recent rise in energy prices and elevated wage costs still mandate caution from central banks in a number of countries. In the euro area, our most important trade partner, y-o-y headline inflation declined further in September, with core inflation also going down. Global inflationary pressures are expected to abate further by the end of this and into next year, but inflation will remain above central bank targets in many countries. Therefore, the ECB decided to further tighten monetary conditions in September by increasing its key interest rates by 25 bp each and following a data-dependent approach when it comes to further decisions. The Fed took a similar stance, though in September it kept its rates unchanged.
In regard to global energy prices, caution is mandated in the face of persisting geopolitical tensions and the recent rise in crude oil prices, reflecting primarily the OPEC+ countries’ decision to extend earlier cuts in supply through the end of the year, as well as growing oil demand. Natural gas prices are also on the rise, given that the winter heating season is nearing and that production in Australia and Norway has decreased. Still, it is estimated that the hike in global energy prices will not have a major negative effect on inflation in Serbia and will not jeopardise its downward trajectory.
The y-o-y inflation trajectory turned downward since April. At 11.5% in August, it was somewhat lower than the current medium-term projection. Inflation deceleration resulted from the slowing down of food prices and prices within core inflation (CPI excluding food, energy, alcohol and cigarettes), whose y-o-y growth since June hovered at one-digit figures, measuring 9.1% in August. The Executive Board expects y-o-y inflation to remain on the downward trajectory, losing 1 pp on average per month and coming at around 8% by year end. Such inflation movements will also be supported by the weakening of global cost-push pressures and the dropping of food and energy H2 2022 price increases from the y-o-y inflation calculation. Also contributing to inflation’s declining path and its return within the bounds of the target in Q2 2024 will be the effects of monetary tightening, deceleration of imported inflation and the expected further fall in inflation expectations.
The movement of monthly indicators suggests that the economic growth dynamics has accelerated further in Q3, overperforming the NBS’s August projection which forecast GDP growth at 2% tо 3%, but most probably closer to the lower bound. Despite the dented external demand, primarily from the euro area, trends more favourable than initially expected have materialised primarily in the manufacturing, owing to past investments and the rise in domestic demand. In addition, the data on the estimated output of main agricultural crops indicate that this year’s season will most probably outperform the average, i.e. the NBS’s expectations. In the remainder of the year a positive contribution is also expected from construction, as a result of continuation of infrastructure projects, as well as from service sectors, thanks to the further rise in employment and wages, primarily in the private sector. Nevertheless, according to NBS estimates, domestic demand will increase at a slower pace than GDP, so no major inflationary pressures are expected on this account.
The NBS will continue to monitor and analyse the movement of key inflation factors in the domestic and international environment and make decisions depending on projected inflation movements. At the same time, it will take due care of the maintenance of financial stability and supporting continuous economic growth, a further rise in employment and a favourable investment environment.
The next rate-setting meeting will be held on 9 November 2023.
Governor’s Office
