Serbian central bank again raises key policy rate

This is the tenth time that the NBS has raised the key policy rate since April 2022.

At the beginning of April last year the key policy rate was one percent, to which it was lowered in December 2020, as a measure against the economic consequences of the coronavirus pandemic. The first increase, to 1.5 percent, followed in April 2022, with the key policy rate reaching five percent at end of last year.

A press release from the NBS Governor’s office said that, at its meeting on Thursday, the NBS Executive Board voted to raise the key policy rate by 25 bp to 5.25 percent, and to increase the deposit and credit facility rates by the same amount – to 4.25 percent and 6.25 percent, respectively.

It said that, by passing this decision, the NBS continues to tighten monetary conditions and contain the second-round effects of cost-push pressures on price growth through inflation expectations.

“It thus helps inflation in Serbia to strike a downward trajectory and return within the target tolerance band until the end of the projection horizon. Today’s hike is the tenth in a row – since April 2022, the rate has been raised by 425 bp in total. The hitherto rate hikes have affected the interest rates in the markets of money, loans and savings, signalling the effectiveness of the monetary policy transmission mechanism via the interest rate channel. By maintaining the relative stability of the dinar against the euro, the NBS also significantly contributes to containing the spillover effect of soaring import prices on domestic prices, and to macroeconomic stability amid heightened global uncertainty,” said the press release.

It added that, though inflation remains largely driven by global cost-push pressures in the production of food and energy, on which central banks have little or no effect, with an array of measures the NBS aims to slow inflation and bring it down closer to the target.

“In addition to tightening monetary conditions by raising the main interest rates and maintaining the relative stability of the exchange rate, the NBS has also adopted a number of measures capping the prices of financial products,” said the press release.

“Globally, positive signs include inflation’s slowdown influenced by energy price reductions in the past several months, lower transport costs, and increasingly less pronounced global supply halts. Moreover, the price growth in the euro area is slowing, though further proofs of a steady easing of inflationary pressures globally are needed. Geopolitical tensions remain elevated. Global energy and food prices are volatile, under the impact of a number of supply- and demand-side factors, which warrants caution in NBS monetary policy conduct. According to flash estimates for December, euro area inflation continued down for the second month in a row, owing to the slowing pace of growth of energy prices, while food prices and core inflation still haven’t lost any traction,” said the Governor’s office.

Besides, it added, preliminary economic activity indicators suggest that, despite sharply increased cost-push pressures and interest rates, as well as rampant geopolitical uncertainty, euro area economic activity last year was better than anticipated, while market participants estimate that the recession in 2023 will not be as deep as initially expected.

“In its policy making, the Executive Board also reckoned with the continued tightening of global financial conditions, amid further monetary tightening by the ECB and the Fed. It is expected, however, that the continued tightening of global financial conditions will contribute to further easing of inflationary pressures, underpinned by the sustained fall in primary commodity prices, and that further monetary tightening by the ECB will dampen external demand, but also raise the prices of euro-indexed loans in the local market,” said the press release.

“The Executive Board’s decision to tighten monetary conditions in the domestic market in a gradual and measured way reflects the view that inflation movements in Serbia are still largely dictated by the global energy crisis, lingering consequences of the pandemic, and the drought that hit our region. Average annual inflation in 2022 was 11.9%. According to SORS (Statistical Office of the Republic of Serbia) flash estimates, y-o-y inflation in December, as in the previous month, equalled 15.1%. The largest contribution to inflation came from the rising food and energy prices. Throughout the year, core inflation moved at a considerably lower level than headline inflation, owing primarily to the years of maintained relative stability of the dinar against the euro. Headline inflation will remain elevated in early 2023 as well, mainly on the back of the announced electricity and gas price hikes, but will strike a downward path thereafter, recording a sharper fall in H2 2023 and returning within the target band by the end of the projection period. Past monetary tightening, the anticipated waning of the effects of global factors that drove up the energy and food prices in the past period, and dented external demand amid a clouded global growth outlook will work towards the easing of inflationary pressures,” it added.

The NBS said that, according to SORS preliminary estimates, Serbia’s real GDP growth in 2022 amounted to 2.3 percent, as a result of the pick-up in industry and services. “A strong contribution to industrial growth came from the rising physical volume of production in mining, but also from manufacturing, despite a hefty rise in global energy prices and persisting supply bottlenecks. On the other hand, agricultural production contracted because of the drought, while construction activity slackened amid soaring costs of construction material and other inputs. The Executive Board notes that despite the construction slack, total fixed investment remains stable owing to the strong inflow of FDI. The labour market continues to display positive trends, with a further rise in employment and wages and a decline in unemployment,” said the press release.

The Governor’s Office said that, depending on the future movement of key monetary and macroeconomic factors from the domestic and international environment, as well as on the global geopolitical situation, the NBS will assess whether there is a need to further tighten monetary conditions and to what extent. Delivering price and financial stability in the medium term remains the NBS’s monetary policy priority, while supporting further economic growth.