10/05/2024
At its meeting today, the NBS Executive Board voted to keep the key policy rate on hold, at 6.50%. The rates on deposit (5.25%) and lending (7.75%) facilities were also kept unchanged.
The Board’s decision was motivated primarily by the medium-term inflation projection and the expected movement of key inflation factors, and by the still elevated, though subsiding, global inflationary pressures, and heightened uncertainty over the global prices of energy and other primary commodities. Moreover, the effects of past monetary tightening have largely spilled over to the cost and volume of private sector borrowing, while financing conditions have stabilised since the key policy rate was raised last time, in July 2023.
The Board also had in mind the continuing deceleration of global inflation, which is, however, still elevated, whilst the risks as to its further movement are increasingly balanced. Most central banks are forecasting with increasing certainty that inflation in their respective countries will retreat within the target band in H2 2024 or H1 2025, owing to past monetary tightening, which has, in all probability, ended. Despite higher core inflation amid tight labour markets, expectations prevail that the ECB will start trimming its key rates in June, which is likely to reflect on the gradual lowering of the price of euro-indexed borrowing in Serbia, whereas the Fed will probably defer this process for some time yet. Caution in monetary policy conduct by the NBS is necessary due to the volatile movement of global prices of primary commodities, notably of oil, in an environment of pronounced geopolitical tensions, continued OPEC+ supply cuts, and a number of other factors.
The Executive Board underlined that y-o-y inflation in Serbia continues to slow down, even faster than expected, and that it measured 5% in March. Core inflation also lost further pace, under the impact of past monetary tightening, and became equal to the headline rate in March. The inflation slowdown reflects the lower food price growth and a further decline in one-year ahead inflation expectations of the financial and corporate sectors. It should be noted that as of the beginning of this year short-term expectations of the financial sector are within the NBS target band as well. The Executive Board expects that inflation will recede further and return within the target band probably this May, which is somewhat earlier compared to the medium-term projection released in February.
Available data on the real sector suggest that the outcomes in Q1 this year were better than expected and that tight monetary conditions did not have any major negative effects on economic activity. According to the SORS flash estimate, real GDP growth stepped up to 4.6% y-o-y, led by the upswing in trade, industry and construction, and receiving a positive impulse from other service sectors too. Favourable developments in the real sector are supported by the further growth in employment and wages and a reduction in unemployment. It should be noted that the slowdown in inflation is also contributing to the real income growth.
The Board stresses that it will keep a close eye on domestic and international markets and that future monetary policy decisions will depend on the pace of further slowdown of inflation at home. Decisions will be made taking into account the maintenance of financial stability and favourable growth prospects.
In today’s meeting, the Executive Board adopted the May Inflation Report with the latest macroeconomic projections that will be presented to the public in more detail at a press conference on 14 May, along with additional explanations of monetary policy decisions.
The next rate-setting meeting will be held on 13 June.
Governor’s Office
