At its meeting today, the NBS Executive Board voted to raise the key policy rate by 50 bp, to 4.5%. It lifted the deposit and lending facility rates by the same amount, to 3.5% and 5.5%, respectively.
The continued rise in cost-push pressures and inflation, reflecting primarily import price growth, influenced the Executive Board’s decision to further raise the key policy rate and thus tighten domestic monetary conditions. In making such decision, the NBS will contribute to limiting the second-round effects of rising prices through inflation expectations and will ensure that inflation strikes a downward path and returns with the bounds of the target tolerance band until the end of the projection horizon. Today’s rate hike is the eighth in a row – the rate has been increased by total 350 bp as of April this year. The spillover of the effects of monetary tightening on interest rates in the markets of money, loans and savings indicates the efficiency of the transmission mechanism through the interest rate channel. By maintaining the relative stability of the dinar exchange rate against the euro, the NBS also considerably contributes to containing the effects of the spillover of rising import prices on prices at home, and to macroeconomic stability amid heightened global uncertainty.
The decision was also guided by the fact that global inflationary pressures are stronger and more durable than initially expected. Inflation in the euro area, our key trade partner, is the highest since the block’s inception, and its return within the target band is not expected before late 2024. High inflation is largely the consequence of soaring energy and food prices, while inflationary pressures in some countries are also generated by domestic demand and labour market factors. In such an environment, over the past months many central banks have been tightening their monetary policies at a more robust than expected pace, revising up their inflation projections and expectations concerning the level and timing of peak inflation. In October the ECB raised significantly its key rate (by 75 bp to 2.00%). In early November the Fed responded to the same degree, raising its fed funds rates to the range of 3.75-4.00%. Along with a clouded global growth outlook, further monetary tightening by leading central banks may fuel volatility in the international financial market and lead to continued rechannelling of global capital flows from emerging to advanced economies. Still, expectations prevail that global inflationary pressures will gradually subside, on account of the effects of monetary tightening by central banks, a further decline in global primary commodity and energy prices, notably of oil, and the ongoing easing of global supply bottlenecks.
Opting for a gradual and calibrated tightening of monetary conditions in the domestic market, the Executive Board took into account that inflation in Serbia is still largely determined by global cost-push pressures, while core inflation (8.6% y-o-y in September), also rising in the past months on the back of higher imported inflation, still trends considerably lower than headline inflation (14% y-o-y in September). A supportive factor is the preserved relative stability of the exchange rate in these extremely uncertain international circumstances. According to the November medium-term projection, headline inflation will remain elevated by the end of this and beginning of the next year, only to strike a downward path thereafter, falling sharply in H2 2023 and returning within the bounds of the target by the end of the projection horizon. Past monetary tightening, the expected weakening of the effects of global factors which drove energy and food price increases in the past period, as well as the lower external demand in conditions of less favourable global growth outlook will work to calm down inflationary pressures.
After relatively high growth in H1 2022, of around 4.1% y-o-y, economic activity slowed down in Q3 – according to the preliminary SORS estimate, y-o-y growth of Serbian GDP measured 1.1%. Economic slowdown was sharper than expected, mostly reflecting this year’s drought and an agricultural season considerably underperforming the assumptions, the reduced external demand and a further rise in production costs, translating primarily into lower construction and manufacturing output. Also, due to the low water levels, the energy sector contracted further. The Executive Board expects the domestic economic activity to continue at a slow pace in the remainder of 2022 and early 2023, but to gain momentum thereafter, with the waning of effects of factors which impacted lower external demand and owing to the planned implementation of investment projects, primarily in infrastructure.
Depending on the global geopolitical situation and movement of key monetary and macroeconomic factors in the domestic and international environment in the coming period, the NBS will assess if there is a need to further tighten monetary conditions and to what degree. The ensuring of price and financial stability in the medium term, along with supporting further economic growth, will remain the priority of monetary policy going forward.
At today’s meeting the Executive Board adopted the November Inflation Report with new macroeconomic projections, the details of which will be presented to the public at the press conference on 15 November.
The next rate-setting meeting of the Executive Board will be held on 8 December.