At today’s meeting, the NBS Executive Board voted to raise the key policy rate by 50 bp, to 2%.
The Executive Board also decided to increase the deposit and lending facilities rates by 50 bp each, to 1% and 3%, respectively.
Such decisions were made as inflationary pressures in the global and domestic markets continued to be stronger and more persistent than anticipated, calling for additional monetary tightening in order to contain second-round effects on inflation expectations and a further rise in inflation.
With a view to curbing inflation in the coming period, the Board raised the key policy rate for the second consecutive time, thereby proceeding with monetary policy tightening, which began last October through gradual increasing of the weighted average rate in the auctions of repo sale of securities – by total 110 bp to date.
Also, the Executive Board stresses that interventions by selling foreign exchange in the local FX market had a twofold effect – they not only maintained relative stability of the exchange rate, but also helped tighten monetary conditions by absorbing a substantial amount of dinar liquidity.
The Executive Board notes that developments in the international market in recent months have been marked by the strengthening of geopolitical tensions and the outbreak of the conflict in Ukraine, which deepened the energy crisis at global level, provided more steam to the prices of primary agricultural commodities and industrial raw materials, and put further strains on international supply chains.
As in most other countries, inflation in Serbia stayed on the upward trajectory, amounting to 9.1% y-o-y in March, still led mostly by the surging food and energy prices. Core inflation (CPI excluding the prices of food, energy, alcohol and cigarettes), which is most affected by monetary policy measures, was almost twice lower than headline inflation and amounted to 4.8% in March, on the back of relative stability of the exchange rate that has been maintained even in these extremely uncertain global conditions.
Consistent with the latest NBS projections, the Executive Board still expects that inflation will strike a downward path in the second half of the year. It will most likely return within the target tolerance band in the second half of 2023, and then continue to slow down until the end of the projection horizon. The Board judges that rising global prices of primary commodities and energy, as well as higher imported inflation will generate inflationary pressures for some time, but these pressures will gradually weaken over the projection horizon. Besides, once the new agricultural season kicks in, fruit and vegetable prices are likely to retreat from their currently high levels. The effects of past tightening of monetary conditions will also work towards calming of inflationary pressures, as will the effects of government economic measures on food and energy prices in the domestic market in the short run.
Geopolitical developments and the escalation of the Ukraine conflicts have greatly added to uncertainty regarding the global economic growth outlook, while further strengthening of inflationary pressures globally prompted many countries to revise up their inflation projections and tighten their monetary policies. In May, the Fed thus continued the cycle of raising the Fed funds rate to the range of 0.75–1.0% and decided to start reducing its balance sheet in June. Although it has still not announced when it plans to raise its main refinancing rate, in March the ECB decided to scale back the volume of its quantitative easing in Q2 amid stronger than anticipated inflationary pressures. The tightening of monetary conditions by the above leading central banks and heightened global uncertainty could negatively affect capital flows to emerging economies, including Serbia. The Executive Board also took account of the fact that, though they declined from mid-April due to a worsening of the global growth outlook, global primary commodity prices remain much higher than at the start of the year, placing pressure on further growth in producer and import prices.
Despite the negative effects produced by the Ukraine conflict on developments in the international commodity and financial markets, most economic activity indicators at home continued to post dynamic growth in Q1. According to the SORS estimate, GDP increased by 4.3% y-o-y in Q1. On the production side, growth was led by the service sectors and industry, and on the expenditure side – by private consumption and fixed investment, as well as the build-up of inventories. The contribution of net exports was negative amid elevated energy imports. Despite a high level of uncertainty, we expect our economy to expand further in the coming period, though GDP growth this year could be somewhat lower than previously expected due to a less favourable global growth outlook after the outbreak of the Ukraine conflict, including primarily the downward revisions of growth projections for the euro area and countries of the region.
Depending on geopolitical developments and the movement in key inflation factors from the domestic and international environment in the coming period, the NBS will estimate whether there is a need to tighten monetary conditions further or whether the effects of past tightening ensure a sustainable return of inflation within the target tolerance band over the projection horizon. Delivering price and financial stability in the medium term remains the NBS’s monetary policy priority, while supporting further economic growth and development, a further rise in employment and a favourable investment environment.
At today’s meeting, the Executive Board adopted the May Inflation Report with new macroeconomic projections, which will be presented to the public at a press conference on 18 May.
The next rate-setting meeting is scheduled for 9 June 2022.