Monetary Policy Strategy and Objectives
Monetary policy objectives
The primary objective of the National Bank of Serbia is to achieve and maintain price stability. In addition to its primary objective, the National Bank of Serbia will also pursue the objective of financial stability. Without prejudice to its primary objective, the National Bank of Serbia will support the economic policies of the Government which are conducive to sustainable economic growth.
Inflation targeting as monetary strategy
In December 2008, the Monetary Policy Committee of the National Bank of Serbia adopted a Memorandum on Inflation Targeting as Monetary Strategy, which defines formal implementation of the inflation targeting regime as of 1 January 2009. The principles of this monetary policy regime have been gradually introduced into practice by the National Bank of Serbia pursuant to the Memorandum on the New Monetary Policy Framework, adopted in August 2006.
The Memorandum on Inflation Targeting as Monetary Strategy has been prepared in compliance with the Agreement between the National Bank of Serbia and the Government of the Republic of Serbia on Inflation Targeting , adopted in the session of the Government of the Republic of Serbia of 19 December 2008.
Main principles of the inflation targeting regime
The inflation target, defined in terms of the annual percentage change in the consumer price index, is the only numerical guideline for the monetary policy implemented by the National Bank of Serbia. The National Bank of Serbia will also support the implementation of the economic policy of the Government if this does not threaten the achievement of the inflation target or the stability of the financial system.
The National Bank of Serbia will achieve the inflation target by changing the interest rate applied in the conduct of its main monetary policy operations (currently, the interest rate on one-week repo operations). This interest rate will be its main monetary policy instrument. Other monetary policy instruments will have supporting roles, as they should contribute to a smooth transmission of the key policy rate to the market and balanced development of financial markets without threatening the stability of the financial system.
The National Bank of Serbia will pursue a managed floating exchange rate regime, which means that the National Bank of Serbia will have the right to intervene in order to limit excessive daily oscillations in the foreign exchange market, contain threats to financial and price stability and safeguard an adequate level of foreign exchange reserves.
The National Bank of Serbia will continue enhancing the transparency of its monetary policy and upgrading efficient communication with the public. The Executive Board will take decisions on the monetary policy on pre-announced dates and will regularly inform the public about the achievement of the set inflation targets and measures taken in order to meet these targets in the future.
Operational guidelines for inflation targeting
1. Setting inflation targets
Inflation targets will be set by the National Bank of Serbia, in cooperation with the Government, on the basis of an analysis of current and expected macroeconomic movements and the medium-term plan of changes in prices under direct or indirect regulation of the Government.
Inflation targets will be set for several years ahead as point targets with a tolerance band, and defined in terms of the annual percentage change in the consumer price index (National Bank of Serbia’s Memorandum on Inflation Targets until 2021, adopted at the NBS Executive Board meeting of 7 December 2017).
2. Achieving inflation targets
The National Bank of Serbia will achieve inflation targets by selecting monetary policy instruments in a sustainable, consistent and predictable manner in order to avoid any unnecessary macroeconomic fluctuations. The key policy rate is the main monetary policy instrument in the inflation targeting regime. Other monetary instruments, including interventions in the foreign exchange market, will only have a supporting role. Adjustments in the key policy rate will be based on the analysis of the current economic situation, assessment of future developments and the medium-term inflation projection.
3. Communicating the Achievement of Inflation Targets: Monetary Policy Transparency and Accountability
The National Bank of Serbia will be transparent and accountable to the public, and will:
4. Coordination of monetary, fiscal and wage policies
In an inflation targeting regime, the coordination between monetary and fiscal policies is of key importance. Pursuant to the Agreement on Inflation Targeting, the Government has committed to conducting a sustainable and predictable fiscal policy consistent with inflation targets.