At its meeting today, the NBS Executive Board voted to keep the key policy rate unchanged at 1.25%.
In making the above decision, the Executive Board was guided primarily by the achieved and expected effects of past monetary and fiscal policy measures aimed at mitigating the negative impact of the pandemic and encouraging economic growth. The Executive Board expects that the timely taken economic policy measures will continue to exert a positive impact on financing conditions for corporates and households, and on their disposable income.
A softer than initially anticipated fall in economic activity in Q2 and better performance in Q3 are largely owed to the well-timed and adequate support provided to the domestic economy by the NBS and the Serbian Government. Having this in mind, the NBS revised the GDP growth projection for this year up from -1.5% to -1%, which is likely to be one of the best outcomes in Europe. Positive trends in the face of the pandemic are strongly underpinned by the recovery in investment, which turned out faster than anticipated, largely as a result of the preserved production capacities and jobs, accelerated implementation of infrastructure projects and the secured more favourable financing conditions. Led by the rising domestic and external demand, the recovery from the crisis should be more than full next year, with a GDP growth rate of around 6%.
The Executive Board stresses that inflation in Serbia has stayed low and stable during the pandemic, as in the past seven years. An important pillar of that stability have been the relative stability of the exchange rate and the well-anchored inflation expectations of the financial and corporate sectors, which at the same time confirm monetary policy credibility. Headline inflation measured 1.8% y-o-y in September, and core inflation was at a similar level (1.7%). Under the NBS’s projection, in the coming period inflation will continue to move in the lower half of the target band, closer to its lower bound, and will gradually trend closer to the target midpoint (3%) in 2022 consistent with the expected further recovery of demand. Such movements indicate that there is room for additional monetary policy easing in the period ahead.
Though global economic rebound since May has been faster than hoped for, the accelerated spread of the coronavirus from October, particularly in Europe, remains a concern. The recovery of the euro area, our most important trade and financial partner, will be supported by additional ECB stimuli announced for December, and by the fiscal stimuli adopted by a number of member states. Developments in the international commodity and financial markets still mandate a cautious monetary policy conduct, reflecting the uncertainty regarding the pandemic, as well as geopolitical tensions in the world. However, the Executive Board highlights our economy’s increased resilience to external shocks, which is a result of a responsible economic policy in the past years and our adequate response to the current global crisis.
Amid renewed and exacerbated health risks, the NBS decided to act proactively and pre-emptively by providing for the possibility of using additional cheap dinar liquidity. Banks will be able to make use of two dinar liquidity lines – by way of additional FX-purchase swap auctions and securities purchase repo auctions. Thus, in an environment characterised by a faster than expected rebound in domestic economy, the NBS seeks to maintain a sufficiently high level of available and cheap liquidity in the banking sector and, in turn, in the corporate sector, in order to ensure the continuation of such stimulating effect.
The banking sector still shows significant excess of dinar liquidity, and the provision of additional assets should make financing conditions even more favourable by maintaining low interest rates and encouraging banks’ lending activity. By organising regular weekly swap and repo auctions (swap on Mondays and repo on Thursdays), banks are given an option to obtain the required dinar liquidity for a three-month period under favourable conditions, using FX or dinar securities as collateral. The first auctions will be held on 16 November (swap) and 19 November (repo).
The Executive Board will continue to keep a close eye on developments and impact of internal and external factors on inflation, financial stability and the pace of economic recovery. In coordination with the Government, the Executive Board is ready to respond in the event of exacerbated negative effects of the pandemic onto movements in the domestic and international environment.
At today’s meeting, the Executive Board adopted the November Inflation Report, to be published on 18 November. Apart from the new inflation and GDP projections, the Report also gives detailed explanations of monetary policy decisions and the underlying macroeconomic developments.
The next rate-setting meeting will be held on 10 December.