09.11.2023.
At its meeting today, the NBS Executive Board kept the key policy rate on hold, at 6.50%. It did not change the rates on deposit (5.25%) and lending facilities (7.75%) either.
The Board’s decision was motivated by further easing of global inflationary pressures, the established downward trajectory of inflation at home and its expected movement within the target band over the monetary policy horizon. Moreover, monetary conditions in the past period were tightened by means of the main instrument – the interest rate, and in September by increasing the required reserve ratio, with the full effects of these measures yet to play out. The transmission of monetary tightening onto the interest rates in the money, lending and savings markets, and the reduction in short-term inflation expectations, signal the effectiveness of the monetary policy transmission mechanism.
In making the decision, the Executive Board took into account the declining global inflation, which, however, remains above the target of almost all inflation-targeting central banks. Amid the alleviation of cost-push pressures, the removal of supply bottlenecks, and tight monetary policy, in October the ECB did not change its main rate, following a data-dependent approach. The Fed held a similar stance as since July it has not changed its fed funds range. Global inflationary pressures are expected to dissipate further in 2024 and contribute to lower inflation at home.
The Executive Board underlined that geopolitical tensions still mandate caution in monetary policy decision-making, particularly in the wake of the new conflict that has broken out in the Middle East, as do the volatile movements of global prices of crude oil and some foodstuffs, which may also impact inflationary expectations. Still, relative to the maximum levels recorded last year, the prices of primary commodities are lower and if geopolitical tensions do not exacerbate further, we should not anticipate a major effect on global and domestic inflation on this account.
Y-o-y inflation in Serbia has been on a downward trajectory since April, with the August and September outturns slightly lower than expected. It slowed down to 10.2% in September on account of lower growth in food prices and core inflation (CPI excluding food, energy, alcohol and cigarettes), which edged down to 8.2%. The importance of monetary policy tightening should also be pointed out as it will, together with other factors, almost certainly drive inflation back to a single-digit level in October and ensure its downward path over the coming months. The retreating inflation reflected on a further fall in one-year ahead inflation expectations of the financial sector, as well as on two- and three-year ahead expectations which are within the NBS’s target tolerance band. According to our new projection, at the end of the year inflation will measure around 8% and return within the target band in mid-2024.
The Executive Board underlined that the Q3 economic growth has outperformed expectations, picking up to 3.5%, according to a SORS estimate. Construction provided the key contribution to such an outcome, owing to stepped-up implementation of infrastructure projects. Manufacturing performed better than anticipated, on the back of past investments and rising domestic demand. Furthermore, data on the yields of the most important crops suggest that this year’s agricultural season turned out to be both above our expectations and above-average. On the expenditure side, growth was led by higher investment, notably of the private sector. Reflecting continued real growth in exports of goods and services and a fall in imports, net exports also provided a positive contribution, though smaller than in the first half of the year.
The NBS will continue to keep a close eye on key inflation factors in the international and domestic environment and make monetary policy decisions based on the projected inflation profile. It will also remain committed to maintaining financial stability and supporting continuous economic growth, as well as employment and a favourable investment environment.
At today’s meeting, the Executive Board adopted the November Inflation Report with the latest macroeconomic projections that will be presented to the public in detail at a press conference on 15 November.
The next rate-setting meeting will take place on 7 December.
Governor`s Office
