10.03.2022.
At its meeting today, the NBS Executive Board voted to keep the key policy rate unchanged at 1.0% and to continue tightening monetary conditions, using the flexibility of the monetary policy framework, by raising the weighted average repo rate in reverse repo auctions, as well as the percentage of excess dinar liquidity withdrawn in those auctions. In the last repo auction held this month, the weighted average repo rate amounted to 0.90%, which is close to the key policy rate and by 79 bp higher than in early October 2021 when the process of monetary tightening began. The decision to increase the average repo rate over the past few months was motivated by the heightened cost-push pressures in the international and local environment and the need to influence inflation expectations of market agents and contain the second-round effects on the prices of other products and services.
In its monetary policy decision-making, the Executive Board had in mind that developments in the international environment call for special caution. Uncertainty that plagued the international commodity and financial markets in recent months due to the emergence of new coronavirus strains was additionally fuelled by geopolitical tensions and the crisis in Ukraine. This has pushed the prices of energy and global primary agricultural commodities and metals close to or even above their historical highs. The outlook for global economic growth is therefore increasingly uncertain, while an additional rise in the prices of energy, food and raw materials heightens the risk that inflationary pressures could turn out to be stronger than anticipated and present over a longer time period. In such circumstances, it remains uncertain at what pace the leading central banks, the Fed and the ECB, will normalise their monetary policies, nor what the effects of heightened uncertainty on financial conditions globally and on capital flows to emerging markets, Serbia included, will be.
As for developments in the domestic macroeconomic environment, the Executive Board states that the available monthly indicators suggest that economic activity in the beginning of the year is broadly in line with the NBS’s expectations. Growth continues to be led by services, construction and mining, while lower activity in the overall industry still mostly reflects the weaker production in the energy sector, and partly also lower manufacturing output due to persistent disruptions to global supply chains. The NBS retains its real GDP growth projection in the range of 4–5% for this year and in the medium term, despite the fact that in the near term downside risks are more pronounced due to the Ukraine crisis, primarily on account of the possibly slower growth of our key trade partners, though the magnitude of the effects will depend the most on how long the crisis lasts. The Board judges that going forward economic growth will be led by the continued investment cycle and the implementation of large-scale infrastructure projects, as well as by a sound personal consumption growth supported by favourable trends in the labour market.
The Executive Board has concluded that y-o-y inflation, which measured 8.2% in January, also moved in line with the NBS’s expectations and remained mainly guided by rising food and energy prices. At the same time, core inflation, which is influenced the most by monetary policy measures, equalled 4.1% y-o-y and was well below headline inflation, thanks to the preserved relative stability of the exchange rate even during the pandemic. Under the latest, February medium-term projection, inflation should start declining from March onwards and continue to slow towards the target midpoint until the end of the projection horizon. Though current developments concerning global prices of energy and primary commodities indicate that inflation could be somewhat higher than projected, the Executive Board still holds that it will be on a declining path until the end of the year. A key contribution to this will come from the relative stability of the exchange rate which the NBS will continue to maintain going forward and which is guaranteed by foreign exchange reserves accumulated over the past years thanks to the achieved macroeconomic stability and measured and timely interventions in the FX market. The start of the new agricultural season and the resulting lower costs in food production are expected to have a downward effect on inflation, as are the measures of the Serbian government capping the increase in fuel prices and enabling corporates to buy electricity in H1 2022 on terms much more favourable than market terms.
Monetary policy decisions in the period ahead will depend on the movement of factors in the international and domestic environment and the assessment of intensity and durability of inflationary pressures stemming from those factors, as well as their impact on financial stability and the pace of economic growth. The NBS stands ready to respond using all available monetary policy instruments in case of materialisation of any of the risks that could have consequences for medium-term price and financial stability.
The next rate-setting meeting is scheduled for 7 April 2022.
Governor's Office
