Key policy rate kept on hold

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 was motivated by the continued subsiding of global inflationary pressures, the established downward trajectory of inflation at home and its anticipated retreat within the target tolerance 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 monetary tightening on interest rates in the markets of money, loans and savings, and a fall in one-year-ahead financial and corporate sector inflation expectations signal the efficiency of the monetary policy transmission mechanism.

Moreover, global inflation is falling faster than anticipated and approaching pre-pandemic levels, reflecting the subsiding of cost-push pressures, the easing of global supply bottlenecks, and the effects of past monetary tightening by most central banks. Although global oil prices are falling in an environment of dented demand, and primary agricultural commodity prices are going down thanks to a good agricultural season, the global uncertainty may drive these prices up and slow inflation’s return within the target band in many countries. Since early 2024, the costs of transport, insurance and other logistics services have gone up due to geopolitical tensions and the difficulties to supply oil, other raw materials and products via the Red Sea and the Suez Canal. Though these developments have so far not significantly impacted global primary commodity prices and inflation of our important trade partners, nor did they affect the prices of products and services that we import, the NBS Executive Board maintains that these movements call for caution in monetary policy decision making. In addition, further global fragmentation may divide countries into trade blocs and trigger significant losses in global production, including negative effects for our key trade partners.
The Executive Board underlined that y-o-y inflation in Serbia continues on the downward trajectory. At end-2023 it was half the level from end-2022, measuring 7.6%, i.e. slightly below the level anticipated in the November projection. Inflation slowed further on the back of weakened cost-push pressures and the base effect from food prices, as well as the effects of past monetary policy tightening, which also contributed to a decrease in core inflation (CPI excluding food, energy, alcohol and cigarettes), to 6.5% y-o-y in December. Going forward, the Executive Board expects inflation to decline further and return within the target tolerance band in mid-year. This will be facilitated by the effects of monetary tightening, slowdown in imported inflation, the still subdued external demand and the anticipated further fall in inflation expectations.

Fixed investments and private consumption helped Serbia’s GDP growth pick up to 3.8% y-o-y in Q4 2023, leading to the real growth of 2.5% at the level of 2023. In view of the subsiding global inflationary pressures and the gradual recovery in the euro area, as well as the anticipated further acceleration in the implementation of planned investment projects in road, energy and utility infrastructure, GDP growth is expected to step up this year to the range of 3–4%, with the central projection value of 3.5%.

In today’s meeting, the Executive Board adopted the February Inflation Report with the latest macroeconomic projections that will be presented to the public in more detail at a press conference on 14 February, along with additional explanations of monetary policy decisions.

The next rate-setting meeting will take place on 7 March.

Governor’s Office