Serbian central bank again raises key policy rate

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The Executive Board of the National Bank of Serbia (NBS) on Thursday again raised the key policy rate by 25 bp, to 5.5 percent. The rates on deposit and credit facilities were raised by the same amount, to 4.5 percent and 6.5percent, respectively.

“In its decision-making, the Board was guided by the persistently high global cost-push pressures, despite the signs of easing, and the necessity to contain their second-round effects on price growth at home through inflation expectations and to impact a part of demand-side pressures,” said the NBS in a press release.

It added that, by doing this, “the National Bank of Serbia helps inflation to strike a downward path and retreat within the target tolerance band until the end of the projection horizon.”

“Today’s hike is the eleventh in a row – since April 2022, the rate has been raised by 450 bp in total. The transmission of the rate increases so far to the rates in the markets of money, loans and savings signals the effectiveness of the monetary policy transmission mechanism via the interest rate channel. Moreover, by maintaining the relative stability of the dinar against the euro, the NBS also significantly contributes to containing the spillover effect of rising import prices on domestic prices, and to macroeconomic stability amid elevated global uncertainty,” explained the Bank.

The Executive Board said that the global growth outlook for this year is somewhat better than expected until recently given that there are signs that global cost-push pressures are easing and that China dropped its zero-Covid policy.

“The weakening of global cost-push pressures reflects falling prices in the energy sector – of gas in Europe and of crude oil globally, the resolution of supply bottlenecks and reduced container shipping rates,” it noted.

However, the Board emphasized that caution should be exercised in monetary policy conduct as more robust growth in China would probably push up the prices of energy and other primary commodities and make it more difficult to fight inflation, which is showing signs of retreating from multi-decade highs globally.”

In addition, the indirect effects of elevated prices of energy and industrial raw materials in the past period are still fueling core inflation and – along with a tight labor market – are slowing the disinflation process in a number of countries.

In late 2022, y-o-y inflation measured 15.1%, with around two-thirds still originating from food and energy prices. As in other countries, over the past months the contribution of energy prices has been declining and that of food prices has continued up.

Even though they slowed down, producer and import prices continue to record relatively high y-o-y growth rates, impacting domestic core inflation. However, core inflation continued to move below headline inflation and measured 10.1 percent y-o-y in December, said the NBS.

The Board expects inflation to remain elevated in Q1 this year, as a consequence of continued spillover of the high cost-push pressures from the prior period and the hike in household electricity and gas prices. In the remainder of the year, and especially in the second half, the Board expects inflationary pressures to ease on the back of past monetary tightening, the anticipated waning of the effects of global factors driving energy and food price growth in the prior period, slower imported inflation, and lower external demand, said the press release.

According to preliminary data of the Statistical Office of the Republic of Serbia (RZS), Serbia’s real y-o-y GDP growth amounted to 0.4 percent in Q4 and 2.3 percent in 2022 overall. The largest contribution to growth in Q4 came from services, owing to continued positive trends in the labour market. Despite headwinds from external demand, industrial production also provided a positive contribution, mainly as a result of the recovery of the electricity supply sector.

One the other hand, agricultural production recorded a decline relative to the previous year because of the drought, while construction activity slackened amid a hefty rise in the cost of construction materials and other inputs. The Executive Board judges that lower external demand in the first half of the year, notably from the euro area, will slow down manufacturing and exports, which will however gather pace from the second half of the year as the effects of factors that weighed on external demand dissipate, said the Bank.

Depending on movements in the key monetary and macroeconomic factors from the domestic and international environment, as well as on how the global geopolitical situation evolves, the NBS will assess whether there is a need for additional tightening of monetary conditions and to what extent, while taking into account the expected effects of past monetary tightening on inflation going forward. Delivering price and financial stability in the medium term remains the priority of the NBS’s monetary policy, along with supporting further economic growth, said the NBS.

The next NBS Executive Board rate-setting meeting will be held on 9 March 2023.