Key Policy Rate Kept on Hold
At today’s meeting, the NBS Executive Board voted to keep the key policy rate on hold, at 3.5%.
In making such decision, the NBS Executive Board had in mind the November inflation projection and movement in inflation factors, the expected effects of past monetary policy easing, better economic performance in the third quarter and a more favourable outlook for the period ahead.
As assessed by the NBS Executive Board, inflationary pressures remain subdued, as confirmed by the slowdown in year-on-year headline and core inflation over the past months, to 2.8% and 1.4% in October. That inflationary pressures are subdued is also indicated by the fact that inflation expectations of the financial and corporate sectors continue to move within the NBS target tolerance band. Since early 2017, fiscal trends have been more favourable than expected and the risk premium has fallen to its new low on record for Serbia, reflecting not only global factors, but also the strengthening of domestic macroeconomic fundamentals and a more favourable outlook for the period ahead. Another drag on inflation comes from lower dinar-denominated import prices.
The NBS Executive Board expects inflation to continue to move within the target tolerance band of 3.0±1.5%. In the first half of 2018, inflation is likely to move below the target midpoint, reflecting the low base for prices of petroleum products and other products which recorded one-off hikes early this year. The expected rise in domestic demand will work in the opposite direction.
The NBS Executive Board carefully monitors developments in the international environment, primarily in the global financial market and world prices of primary commodities. Uncertainty in the international financial market over the divergence of monetary policies of the leading central banks – the Fed and the European Central Bank, still prevails, which may affect global capital flows towards emerging economies, including Serbia. In addition, uncertainty surrounds also the movements of world prices of primary commodities, especially world oil prices, which recorded moderate growth in the previous months. Nevertheless, the Executive Board points out that the resilience of our economy to potential negative impacts from the international environment has increased, owing to the strengthening of domestic macroeconomic fundamentals and a more favourable outlook for the period ahead.
September and October easing of monetary policy passed through to interest rates on new dinar loans which dropped by 0.3 pp in the household segment and by 0.4 pp in the corporate segment in October. Lower lending interest rates, coupled with the acceleration of economic activity, recovery in the labour market and a decline in the risk premium reflected positively on lending which sped up to 6.4% year-on-year in October, or to 11.3% if we exclude the effect of the write-off of non-performing loans whose share fell to its lowest level in the last nine years.
With the gradual waning of the effects of shocks on the supply side, GDP growth accelerated to 2.1% year-on-year in the third quarter. A pick-up in activity was mostly recorded in manufacturing, which was positively affected by improved investment ambience and recovery in external demand. That investment ambience has improved is also attested by Serbia’s further progress on global competitiveness lists. Owing to labour market recovery, the services sectors also recorded accelerated activity.
At today’s meeting, the NBS Executive Board adopted the Memorandum on Inflation Targets until 2020, which sets the inflation target at 3.0±1.5% until 2020.
The next rate-setting meeting will be held on 11 January 2018.