Key Policy Rate Kept on Hold
At today’s meeting, the NBS Executive Board voted to keep the key policy rate on hold, at 3.0%.
In making such a decision, the Executive Board was primarily guided by the expected movement in inflation and its underlying factors going forward, and the effects of past monetary policy easing. After reaching this year’s low in April, inflation returned within the target tolerance band and measured 2.3% y-o-y in June, consistent with expectations. According to the August central projection as well, y-o-y inflation is expected to continue to move within the target tolerance band in the next two years. By the end of 2019, inflation will most probably be below the target midpoint, while gradually approaching the midpoint in the first months of 2019 owing to the low-base effect early this year. The inflation expectations of financial and corporate sectors remain low and anchored around the 3% target both one- and two-year ahead.
As assessed by the Executive Board, the effects of past monetary policy easing contribute to accelerating economic growth, which measured 4.5% y-o-y in the first half of 2018, according to the preliminary estimate of the Serbian Statistical Office. Investment is a strong contributor to economic growth and will ensure continued broad-based growth in export-oriented sectors. Investment growth is underpinned by favourable financing conditions and rising lending activity, as well as by FDI inflows which more than fully cover the current account deficit and help in its reduction in the medium run.
The Executive Board believes that caution in the pursuit of monetary policy is still needed, primarily in view of uncertainty in the international commodity and financial markets. Movements in global oil prices are still volatile, although based on the futures they are expected to stabilise by the end of 2018 and decline somewhat by late 2019. In view of the current hike in oil prices, inflation in the international environment is expected to rise slightly. Also, leading central banks, the Fed and the ECB, are expected to continue with monetary policy normalisation, which could have an adverse effect on capital flows to emerging economies. In addition, there is also uncertainty with regard to geopolitical and trade tensions and the possible effects on global growth and volatility in commodity and financial markets. Nevertheless, the Executive Board points out that the resilience of our economy to potential negative effects from the international environment has increased, owing to improved macroeconomic indicators and a more favourable outlook for the period ahead.
At today’s meeting, the NBS Executive Board adopted the August Inflation Report, which will be presented to the public on 15 August, when monetary policy decisions and the underlying macroeconomic developments will be discussed in more detail.
The next rate-setting meeting will be held on 6 September 2018.