10/02/2022
At its meeting today, the NBS Executive Board voted to keep the key policy rate on hold, at 1.0%. The NBS continued reducing its monetary policy accommodation by increasing the weighted average interest rate in reverse repo auctions as well as the percentage of excess dinar liquidity withdrawn in those auctions. The NBS has thus used the flexibility of its monetary framework, which allows it to adjust monetary conditions even without changing the main interest rates. The weighted average interest rate at the last repo auction held this month came at 0.75%, up by 64 basis points since October last year, when the process of monetary tightening began. The decision to gradually raise this rate over the past months was motivated by heightened cost-push pressures at home and abroad, and the need to influence inflation expectations of market agents and contain the second-round effects on the prices of other products and services.
The Executive Board underlines that inflation is still mostly driven by supply-side factors, notably higher energy and food prices, which account for three-quarters of the 7.9% y-o-y inflation in December 2021. According to the February medium-term projection, during Q1 2022 y-o-y inflation will again move around the level recorded at the end of last year or slightly above it, reflecting the effects of the still rising cost-push pressures due to the prices of energy and other primary commodities, halts in supply and high transport prices globally. As of Q2, inflation should strike a downward trajectory and settle within the 3.5–4% range at the end of the year, thereafter slowing down towards the target midpoint until the end of the projection horizon. The Board holds that inflation will slow down as a result of the dissipation of the effect of higher energy and food prices, the anticipated gradual resolution of halts in global value chains, as well as the effects of monetary policy tightening to date and the relative stability of the exchange rate which will be maintained going forward. In the short term, price growth should also soften on account of the Serbian Government’s measures to temporarily cap the prices of food staples and the price of electricity for companies.
In making the decision on monetary conditions, the Executive Board estimated that the Serbian economy retained a robust growth dynamic on sustainable grounds, which will continue despite the reduced level of monetary policy accommodation. According to the preliminary estimate of the SORS, growth in Serbia’s GDP in Q4 2021 came at 6.9% y-o-y, while at the year level it measured 7.5%. Such outcome resulted from the pick-up in service sectors and construction, as well as in industry, despite the persisting challenges caused by disrupted global supply chains.
A negative contribution to growth originated only from agriculture, which contracted by 5% due to drought. Despite a somewhat less favourable global growth outlook, the Executive Board maintained the estimate that the economic growth rate this year and in the medium term will range between 4% and 5%, supported by the continued investment cycle and implementation of large infrastructure projects, as well as the rise in personal consumption on the back of favourable labour market trends.
The international environment is still characterised by the elevated uncertainty as to the impact of the course of the pandemic and emergence of new virus strains on the pace of global economic growth, movement of global prices of primary commodities and by extension, on inflation. However, it is encouraging that the negative effects of the Omicron variant turned out to be weaker than expected, partly owing to the fact that economies worldwide showed a high degree of adjustment to the changed business conditions amid the pandemic. According to the estimates of leading financial institutions, the energy crisis and protracted effects of halts in global supply chains caused minor downward adjustments to global growth prospects. Nevertheless, growth is expected to pick up in the second half of the year, also aided by the announced relaxation of containment measures, primarily in Europe. That should reflect positively on Serbian exports and manufacturing.
Caution in the conduct of NBS’s monetary policy is also mandated by movements in the international commodity and financial markets. After temporarily calming down by the end of last year, crude oil prices have turned upward again since January, mostly due to the geopolitical tensions and increased energy demand, with prices of other primary commodities following suit. Still, according to market expectations (oil futures), the prices of crude oil and primary agricultural commodities should stabilise and then decline gradually in the coming period. Developments in the international financial market and capital flows toward emerging economies, including Serbia, will remain under the dominant sway of the decisions of leading central banks, the Fed and the ECB, which are now likely to resort to stronger than expected monetary tightening, given the inflation trending well above the target and pressures from the labour market.
As so far, monetary policy decisions in the period ahead will depend on the movement of factors in the international and domestic environment and the assessment of intensity and durability of inflationary pressures stemming from those factors. The NBS stands ready to respond promptly using all available monetary policy instruments in case of materialization of any of the risks that would keep inflation above the upper bound of the target tolerance band for a longer period of time.
At today’s meeting, the Executive Board adopted the February Inflation Report, with new macroeconomic projections, the detailed account of which will be presented at the press conference on 18 February.
The next rate-setting meeting is scheduled for 10 March 2022.
Governor’s Office
