Key Policy Rate Raised to 9.5 Percent
After reviewing current economic developments at its meeting today, the NBS Executive Board decided to raise the key policy rate by 50 basis points to 9.5 percent.
The Executive Board took into account pressures generated by inflation expectations fuelled by the growth in food prices, and to a lesser degree, pressures generated by the past depreciation and expected faster recovery in aggregate demand. It is currently estimated that year-on-year CPI inflation in October 2010 will move above the upper bound of the target tolerance band set for that month (6.3±2%), which is higher than anticipated at the time of the August Inflation Report.
By raising the key policy rate, the National Bank of Serbia seeks to ensure the achievement of medium-term inflation target.
The temporary rise in food prices resulting from poor agricultural season in Serbia and worldwide has been the key driver of inflation growth over the last several months.
Notwithstanding stabilisation of the foreign exchange market, past depreciation of the dinar will continue to feed through into higher import prices for some time yet.
Continued economic recovery, as well as the decision to lift the freeze on public sector wages and pensions, is likely to dampen the disinflationary impact of aggregate demand.
In view of the above, the NBS Executive Board judges that the 50 basis points increase in the key policy rate is needed in order to contain medium-term inflation within the set targets (4.5±1.5% for end-2011 and 4±1.5% for end-2012).
The next rate-setting meeting of the NBS Executive Board is scheduled for 11 November 2010.