12/09/2024
At its meeting today, the NBS Executive Board voted for further monetary easing, cutting the key policy rate by 25 bp to 5.75%. The rates on deposit and lending facilities were also lowered – to 4.5% and 7%, respectively.
The Board was guided by the fact that inflation has been hovering within the target tolerance band (3±1.5%) since May, is likely to stay there until the end of the projection horizon and decline further towards the midpoint. Taking into account the actual and expected movement of key inflation factors, notably further alleviation of global inflationary pressures and the disinflationary effect of restrictive monetary measures so far, the Board concluded that conditions are in place to proceed with monetary easing by cutting the key policy rate. As assessed by the Board, monetary policy remains tight despite the initiated easing. Looking ahead, the NBS will maintain a cautious approach to monetary policy relaxation and will base its decisions on the incoming inflation and macroeconomic data.
Though somewhat more gradual than initially expected, global inflation continued to slow on the back of both supply- and demand-side factors. On the supply side, the previously trimmed prices of energy and food, as well as the better functioning of global supply chains acted as a drag on inflation. On the demand side, the interest rates of leading central banks are still having a disinflationary effect, and, in real terms, they will remain elevated for a while longer. The Executive Board was aware of the predictions by relevant institutions as to the downward trend in global oil price movements going forward, thanks to the better oil supply in the market by the OPEC+ countries, as well as slower growth in oil demand.
Inflation in Serbia is within the bounds of the target tolerance band (3±1.5%) and on the path consistent with the NBS projection. In July, y-o-y inflation equalled 4.3%, while monthly inflation measured 0.4%, equalling the average monthly outturns since the start of the year. Inflation growth in July is also partly attributable to international movements, and the monthly inflation dynamics was marked by hikes in the prices of certain categories of processed food – bread, coffee and confectionery, as they reflected the increased prices of their counterparts in the global market or of raw materials in production, as well as growth in the prices of services. Going forward, inflation should continue to move within the bounds of the target tolerance band, slowing down to around 4% at year end, only to gradually come close to the 3% target midpoint during the next year. This will mostly be facilitated by the still tight monetary conditions, lower imported inflation and inflation expectations, as well as the anticipated fall in global oil prices in line with futures. The “Best Price” campaign, scheduled to unfold until end-October and aimed at preserving citizens’ living standard, should also work towards driving inflation down.
In making monetary policy decisions, the Executive Board took account of the fact that Serbia’s economic growth is supported by declining inflation, real wage growth and falling unemployment (to an all-time low of 8.2% in Q2, according to the Labour Force Survey), current investment cycle and the improvement of credit conditions resulting from monetary policy easing. GDP growth measured 4.3% y-o-y in H1 2024, guided by domestic demand, with the largest contribution coming from household consumption and gross fixed investment. On the production side, economic growth was mostly supported by the service sectors, particularly trade, as well as by construction and manufacturing. Though the results of this year’s agricultural production will probably be poorer than anticipated due to the summer drought, in our estimate this will not reflect on our annual GDP growth projection of 3.8% as trends in other sectors remain favourable.
The NBS Executive Board will continue to follow closely and analyse developments in the domestic and international market and make monetary policy decisions on a meeting-to-meeting basis depending on the assessment of incoming data, the outlook for inflation and its key factors, and the effects of past monetary policy measures. In making decisions, the Board will remain mindful of the preservation of financial stability and favourable growth prospects.
The next rate-setting meeting will take place on 10 October.
Governor’s Office
