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Monetary Policy | Monetary Policy Strategy and Objectives

Monetary Policy Objectives for 2006

Monetary Policy Objectives for 2006

A significant reduction of the inflation rate relative to the preceding year is the principal monetary policy objective for 2006. An additional monetary policy objective is to maintain financial system stability¹  .

Each year, the National Bank of Serbia draws up a monetary policy programme in which it presents its estimates of the pace of money growth necessary in order to accomplish the projected inflation rate for that year. As actual developments are monitored during the year and compared with the projected ones, in the event of onset of any unforeseen factors, the National Bank of Serbia revises its forecasts.

The objectives and assumptions which constitute the basis for the economic policy set out in the existing economic policy documents²  represent the starting point for projections of monetary aggregates. 2006 GDP growth is thus expected to amount to 5%. GDP growth will be consistent with a gradual reduction of inflation to the level of 4.5% at the end of 2008, and with the cut in the ratio of public spending to GDP, which will be attended by accelerated implementation of structural reforms in the real, financial and public sectors. Also, net foreign assets of the banking sector are expected to rise by USD 660 million at the official median rate of exchange as of December 31, 2005.

Monetary aggregates and current account, growth rates in %
(December to December of the previous year)

  2004 2005 2006
Net foreign assets of the banking sector
(in USD million)¹
58.0 1,400.0 660.0
Reserve money
(growth rates in %, December to December)²
10.0 22.4 6-7
Money supply M2
(growth rates in %, December to December)²
17.4 31.4 15-16
Balance of payments current account(in USD million)³ -2,827 -1,831 -2,431
(in % GDP) 12.6 8.2 9.7

¹  Calculated at the exchange rate as of the end of the preceding year.
²  Growth rates for 2006 have been derived relative to the projected December 2005.
³ Balance of payments current account for 2005 has been shown for the first 11 months.

The National Bank of Serbia estimates that, in view of the abovementioned economic policy assumptions, the accomplishment of monetary policy objectives will involve a 6% to 7% rise in reserve money, and a 15% to 16% rise in dinar money supply – monetary aggregate M2.

In 2006, the National Bank of Serbia will continue to strengthen and develop indirect monetary regulation instruments, at the same time encouraging the development of the interbank money market with a view to ensuring a more efficient banking sector liquidity management. As part of indirect monetary regulation instruments, the National Bank of Serbia will conduct open market operations, implementing the policy of real interest rates, where the interest rate on two-week repo operations will have the role of the reference (signaling) rate.

In the oncoming medium term period, the National Bank of Serbia will continue to conduct a monetary policy in which reserve money and money supply growth are linked to developments in net foreign assets3 and to the managed float dinar exchange rate policy, with the aim of curbing inflation and strengthening confidence in the domestic currency.

¹  Monetary Policy Programme of the National Bank of Serbia for the Year 2006 .
²  Memorandum of Budget, Economic and Fiscal Policy for 2006, with projections for 2007 and 2008. 
³  This criteria specification is based on the conceptual framework of the financial programme, a theoretical concept known as the monetary approach to the balance of payments developed in the International Monetary Fund.