- NBS

Though year-on-year inflation was around the lower bound of the target tolerance band in April, it is expected to rise moderately towards the target from May onwards. This rise will be driven by the growth in import prices, the onset of a new agricultural season, and the increase in administered prices in the second half of the year. Based on the NBS projection, inflation is expected to move around the upper bound of the target tolerance band in late 2012 and early 2013. With this in mind, the Executive Board voted to raise the key policy rate to 10 percent.

The Executive Board noted once again that the degree of monetary policy restrictiveness in the coming period will depend primarily on the speed of enactment and implementation of the fiscal consolidation programme, the intensity of the programme itself, and continuation of the arrangement with the IMF.

To support financial stability, the Executive Board also decided in its meeting today:

to keep the current foreign exchange required reserve ratios, while at the same time increasing the dinar share of allocations under foreign exchange required reserves from 20 to 27 percent for the sources of funding with maturity of up to two years, and from 15 to 19 percent for the sources of funding with maturity of over two years, as well as
to increase the required reserve ratio on dinar liabilities with a foreign currency clause to 50 percent for all maturities.

These measures are expected to lessen the difference between the cost of borrowing in dinars and in foreign exchange, contribute to the stabilisation of movements in the foreign exchange market, and provide an additional impetus to long-term borrowing in the coming period.

Governor Šoškić will explain the reasoning behind the above decisions at a press conference tomorrow.

The next rate-setting meeting will take place on 12 July.

Governor`s Office