09/06/2022
At its meeting today, the NBS Executive Board voted to raise the key policy rate by 50 bp to 2.5%.
As the NBS interest corridor remained unchanged (±100 bp, i.e. ±1 pp relative to the key policy rate), the credit facility rate equals 3.5% and the deposit facility rate 1.5%.
In making the decision on further tightening of monetary conditions, the Executive Board took into account the continuation of the Ukraine conflict, which resulted in deepening of the energy crisis globally, a further spike in the prices of primary agricultural commodities and industrial raw materials, and the continued aggravated functioning of international supply chains. Amid the build-up of inflationary pressures globally, the Executive Board assessed it was necessary to further tighten the monetary conditions at home, in order to limit the second-round effects on inflation expectations and preempt a further hike in domestic inflation. The NBS invests considerable effort to this end, including, among other measures, by maintaining relative stability of the dinar exchange rate against the euro.
As in most other countries, inflation in Serbia continued along the upward trajectory. It measured 9.6% y-o-y in April, with food and energy prices still accounting for around two thirds. Core inflation (headline inflation excluding the prices of food, energy, alcohol and cigarettes) went up reflecting an upturn in imported inflation. Still, measuring 5.5% in April, core inflation remains much below both the core inflation of regional peers and headline inflation at home. In addition to preserved relative stability of the exchange rate, an important factor behind lower and stable core inflation are medium-term inflation expectations of the financial sector, which continued to move within the NBS target tolerance band.
According to the May medium-term projection, inflation will hit a downward trajectory in H2 2022 and return within the target band in H2 2023. As assessed by the Executive Board, the rise in global prices of primary commodities and energy, and higher imported inflation will for some time yet be exerting inflationary pressures, whereafter they are expected to gradually dissipate. The new agricultural season should bring fruit and vegetable prices down from their currently high levels. Working towards the calming of inflationary pressures will also be the effects of past monetary policy tightening and, in the short run, the effects of the government economic measures aimed at capping the prices of basic foodstuffs and energy in the domestic market.
Geopolitical developments and the escalation of the conflict in Ukraine have considerably dimmed the global economic growth prospects, while the further build-up in inflationary pressures at international level has led to upward revisions of inflation forecasts for a large number of countries and to a tightening of their monetary policies. Thus, the FED continued the cycle of rate hikes in May (in total by 75 bp this year), to the range of 0.75–1.0%, and decided to start scaling down its balance sheet in June. It is certain that the FED will tighten monetary conditions further in the months to come. Amid stronger than anticipated inflationary pressures, the ECB decided in March to additionally trim the volume of quantitative easing in the course of Q2, only to announce in May that it might suspend net asset purchases in early Q3 and start with rate increases. Monetary tightening by leading central banks, as well as mounting global uncertainty, could dampen the risk appetite of international portfolio investors who determine the pace of capital flows to emerging markets. In addition to this, the Executive Board took into account that global primary commodity and energy prices were extremely volatile in recent months and that they are still considerably higher than at the beginning of the year and, as such, producing upward pressure on producer and import prices. Having subsided in April, the global oil price rose again following the introduction of an additional package of sanctions on Russia, which includes EU oil imports from that country.
Despite the negative effects of the Ukraine conflict on developments in the international commodity and financial markets, most indicators for the period January–April point to continued economic growth at home. According to the SORS estimate, our GDP increased by 4.4% y-o-y in Q1. On the production side, growth was led by the service sectors and industry, and on the expenditure side – by private consumption and fixed investment. The build-up of inventories also exerted a positive effect, while net exports provided a negative contribution, mainly due to the growth in energy imports. Despite a high degree of uncertainty, the NBS expects our economy to expand further in the coming period. GDP growth this year is forecast within the range of 3.5–4.5%, which is 0.5 pp lower than expected at the beginning of the year because of the unfavourable global growth outlook following the outbreak of the Ukraine conflict – most of all, because of the expected lower growth of the euro area and countries in the region. Assuming there is no further worsening of geopolitical tensions and gas cutoffs globally, the NBS has kept the medium-term growth projection at 4–5% per year.
Depending on geopolitical developments and the movement in key inflation factors from the domestic and international environment in the coming period, the NBS will assess whether there is a need to tighten monetary conditions further or whether the effects of past tightening ensure a sustainable return of inflation within the target tolerance band over the projection horizon. Delivering price and financial stability in the medium term remains the NBS’s monetary policy priority, while supporting further economic growth and development, a further rise in employment and a favourable investment environment.
The next rate-setting meeting will take place on 7 July 2022.
Governor’s Office
