07/03/2024
At its meeting today, the NBS Executive Board voted to keep the key policy rate on hold, at 6.50%. It did not change the deposit (5.25%) and lending facility (7.75%) rates either.
The Board’s decision to keep the key policy rate unchanged for the eighth month in a row was motivated by receding, though still elevated global inflationary pressures and the current medium-term inflation projection according to which inflation is expected to retreat within the NBS target band in mid-2024. The Board also took into account the past increases in the key policy and required reserve rates, whose effects will continue to spill over to inflation. The pass-through of past monetary tightening on interest rates in the markets of money, loans and savings, and the fall in one-year-ahead financial and corporate sector inflation expectations signal the efficiency of the monetary policy transmission mechanism.
Moreover, global inflation continues to slow and approach pre-pandemic levels, reflecting the subsiding of cost-push pressures, the easing of global supply bottlenecks, and the effects of past monetary tightening by central banks. Although transportation and other logistics costs went up due to geopolitical tensions and issues surrounding shipping through the Red Sea, this has so far had no major impact on global prices of oil, other energy and primary commodities, or on inflation of our main tradе partners, partly also because of subdued global demand. The NBS Executive Board nonetheless maintains that pronounced geopolitical tensions mandate caution in monetary policy decision making. In addition, further global fragmentation may trigger significant losses in global production, including negative effects for our key trade partners. In such conditions, expectations have receded that leading central banks, the Fed and the ECB, might start easing their monetary policies even before mid-year.
Inflation in Serbia stayed on a downward path this year and measured 6.4% according to the estimates underlying the NBS’s February medium-term projection. Further slowdown in inflation was aided by the subsiding of cost-push pressures and the high base effect from food prices, as well as the effects of past monetary tightening, which also helped push core inflation (CPI excluding food, energy, alcohol and cigarettes) down to 5.9% y-o-y in January. The Executive Board expects inflation to decrease further, return within the target band in mid-2024 and approach the target midpoint by the year end and hover around that level in the medium term. Such inflation profile will be underpinned by the past monetary policy tightening, the slowdown in imported inflation, persistently weak external demand and the expected further drop in inflation expectations.
SORS data confirm that GDP growth, led by fixed investment and private consumption, stepped up to 3.8% in Q4 2023, and by 2.5% in real terms in 2023 overall. Having in mind the weakening of global inflationary pressures and the gradual recovery of the euro area, as well as the expected further acceleration of the implementation of planned investment projects in transport, energy and utility infrastructure, the NBS Executive Board forecasts Serbia’s GDP growth this year within the 3–4% range, with the 3.5% central value. Available monthly data seem to support such projection of economic growth this year. Industrial production increased 6.9% y-o-y in January, while continued employment growth and a reduction in unemployment, indicated by the results of the Labour Force Survey for Q4 2023, contributed to a rise in real retail turnover (4.1% y-o-y) and a higher number of arrivals and overnight stays of domestic tourists.
The Board stresses that future monetary policy decisions will depend on the movement of key inflation factors at home and abroad and on the pace of domestic inflation’s further slowdown. Decisions will be made taking into account the effects on financial stability and GDP, as well as the maintenance of financial stability and favourable growth prospects.
The next rate-setting meeting will be held on 11 April.
Governor’s Office
