Key policy rate kept on hold

At its meeting today, the NBS Executive Board voted to keep the key policy rate at 1.0%.

In making the decision, the Board was guided primarily by favourable economic developments at home and the fact that real GDP growth of 7.6% in H1 exceeded initial expectations. The high rate of real economic growth partly reflects the low last year’s base, but also favourable current trends. Contributing factors include, in particular, the effects of adopted monetary and fiscal policy measures, and, by extension, the preserved investment and consumer confidence, as well as production capacities and jobs. Faster than expected economic growth suggests that the NBS’s projected GDP growth rate of 6.5% for this year could even be exceeded. More than a half of economic growth should result from higher fixed investment, followed by personal consumption. A positive impetus is also expected from net exports, owing to faster growth in goods and services exports than imports. The improvement of the external position will continue to be driven by rising export capacities, encouraged by robust FDI inflows, as well as anticipated global recovery. The Executive Board also took into account the upward adjustment of the medium-term growth projection from 4.0% to the 4–5% range, in light of the announced numerous infrastructure projects and their expected direct and indirect effects on GDP.

While analysing the inflation profile, the Board had in mind that inflation is moving within the target band (3±1.5%) and that, consistent with expectations, it stood at 3.3% y-o-y in June and July. Somewhat higher inflation compared to the start of the year reflects temporary factors, notably the low last year’s base, elevated global prices of oil and other primary commodities over the past months, which, along with halts in global supply chains, generated stronger cost-push pressures in the world and domestic markets. In addition, since April domestic vegetable prices have been on a somewhat sharper upturn. Conversely, despite the vigorous growth of our economy, there are no significant demand-side inflationary pressures. Their absence is also indicated by the continued low and stable core inflation (around 2%), and short- and medium-term inflation expectations, which are around the midpoint in the financial sector and are even lower in the corporate sector. The Executive Board expects inflation to continue to move within the target band in the coming period – in the upper half of the band until Q2 2022, only to decelerate towards the midpoint with the waning of the effects of this year’s rise in global primary commodity prices and cost-push pressures in production and transport. In H2 2022, inflation is expected to move in the lower part of the target band.

Should inflationary pressures gather momentum, the NBS stands ready to respond promptly even between Executive Board meetings by fine-tuning dinar liquidity conditions and by directing the average repo rate appropriately. The domestic monetary framework, i.e. the model of main repo operations, gives the NBS greater flexibility in the conduct of monetary policy, enabling the Executive Board to respond appropriately and timely, even without changing the main interest rates.  

Though movements in the international environment are still greatly dependent on the course of the pandemic, global economic recovery is picking up the pace thanks to vaccine rollout and the economic policy support of leading economies. New virus strains still pose a risk to global growth, as do occasional halts in supply chains and imbalances in the labour market since they ramp up production costs. Economic activity indicators of the euro area, our key economic partner, have stayed in the positive territory, supported by the rise in new orders driven by stronger demand.  So far, accelerated growth in the euro area, as well as higher inflation since the start of the year, has not driven the ECB to lower the degree of monetary policy accommodation, because higher inflation factors are judged to be temporary. While the Fed will most likely not raise its interest rates any time soon, it could decide to scale down by the end of the year its asset purchases within the quantitative easing programme, which could affect capital flows to emerging countries, Serbia included, and therefore calls for caution in monetary policy conduct. The Executive Board also took into account that oil and other primary commodity prices remain significantly volatile and their movement dependent on a number of factors.

Though led mostly by temporary factors, the inflation surge is seen in advanced and developing countries alike. Looking at the region and developing countries pursuing the inflation targeting regime, almost all countries, except Serbia, have had their inflation targets overshot. For this reason, many central banks announced or began the process of monetary policy tightening. As so far, the NBS Executive Board will keep a close eye on developments in the domestic and international environment, standing ready to use, if needed, all available instruments and to act timely, with a view to maintaining price stability in the medium run.

Delivering price and financial stability will remain a priority of the monetary policy, together with support to faster growth of our economy and employment, further rise in the export sector, as well as to favourable investment environment. The NBS will continue to carefully monitor the trends and impact of the key factors in the domestic and international environment on inflation, financial stability and the speed of economic recovery, and to adjust its measures accordingly, in the interest of our corporates and citizens.

The next rate-setting meeting is scheduled for 7 October 2021.

Governor’s Office