13.07.2023.
At its meeting today, the NBS Executive Board voted to raise the key policy rate by 25 bp, to 6.5%. It also raised the deposit and lending facilities rates to 5.25% and 7.75%, respectively.
In making such decision, the Executive Board assessed that monetary conditions need to be moderately tightened further to prevent a rise in inflation expectations and ensure that inflation strikes a sustainable downward path and returns within the target tolerance band in the projection horizon. The pass-through of the hitherto key policy rate hikes onto the rates in the markets of money, loans and savings signals the efficiency of the monetary policy transmission mechanism through the interest rate channel.
The weakening of global cost-push pressures has continued, and global prices of energy, food and industrial raw materials are on a decline in y-o-y terms. However, the Executive Board believes that continued moderate tightening of monetary policy is still necessary given that inflation at the global level is showing signs of greater resilience than anticipated. Though inflation is gradually declining in many countries, it is still relatively high. Caution is also mandated by core inflation, which is receding at a slower pace than headline in many countries, due to the elevated inflation expectations and labour market factors, most of all further wage growth. This means that the struggle of central banks with inflation is not yet over and that an increase in policy rates of the world's leading central banks can be expected in the coming period as well. In the euro area, our key trade partner, headline inflation continued down, but its level is still well above the target. Emphasizing its determination to ensure inflation’s return to the target, the ECB tightened monetary policy further in June. Inflation is somewhat lower in the United States, which justifies the Fed’s decision to keep the policy rate unchanged in June after 10 consecutive increases, without excluding the possibility of further increases in the period ahead. The Executive Board maintains a cautious approach to monetary policy conduct due to the uncertainty regarding the duration of the conflict in Ukraine, as well as the availability of energy resources and their prices in the coming period.
Consistent with the Executive Board’s expectations, y-o-y inflation slowed down further, reaching 13.7% in June. Inflation slowdown was supported by petroleum product prices, core inflation that returned to single digits, and food prices. Still, it is important to note that vegetable prices recorded further growth, even though they should typically decline with the onset of the new agricultural season as of May. The main reason for such dynamics is the unfavourable agrometeorological situation (heavy rainfall). While agrometeorological conditions may cause vegetable prices to deviate from the seasonally typical patterns in the coming period as well, i.e. it is possible that they will record a smaller fall during the summer months than usually, the Executive Board expects that y-o-y inflation will stay on a downward path and fall more sharply in the second half of the year. Inflation’s downward trajectory will be underpinned by the past monetary tightening, the easing of the effects of global factors driving energy and food price growth in the prior period, the slowdown in imported inflation, and the stabilisation and expected fall in inflation expectations.
Real sector indicators suggest that in Q2 as well economic activity will grow in both q-o-q and y-o-y terms, owing primarily to favourable external trade movements – goods exports (in EUR) increased by 10.5% y-o-y, while goods imports decreased by 11.6% y-o-y in the period January–May. Within exports, a rise is recorded in manufacturing and electricity exports, while the decrease in imports reflects mainly lower imports of energy and intermediate goods.
By maintaining the relative stability of the exchange rate of the dinar against the euro, the NBS significantly contributes to overall macroeconomic stability amid heightened global uncertainty. The NBS will continue to monitor and analyse trends in international commodity and financial markets and to make monetary policy decisions depending on the incoming data, taking also into account the expected effects of the past monetary tightening on inflation going forward. Ensuring price and financial stability in the medium term will remain monetary policy priority in the coming period, along with supporting further economic growth and development, as well as a rise in employment and preservation of a favourable investment environment.
The next rate-setting meeting will take place on 10 August.
Governor’s Office
