National Bank of Serbia (NBS) raises key policy rate to 2.5%

Illustration: Nikola Jovanovic; Photo: Shutterstock

At the same time, it was decided that the NBS interest corridor remained unchanged (±100 bp, i.e. ±1 pp relative to the key policy rate), the credit facility rate equals 3.5% and the deposit facility rate 1.5%.

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In making the decision on further tightening of monetary conditions, the Executive Board took into account the continuation of the Ukraine conflict, which resulted in deepening of the energy crisis globally, a further spike in the prices of primary agricultural commodities and industrial raw materials, and the continued aggravated functioning of international supply chains.

Amid the build-up of inflationary pressures globally, the Executive Board assessed it was necessary to further tighten the monetary conditions at home, in order to limit the second-round effects on inflation expectations and preempt a further hike in domestic inflation. The NBS invests considerable effort to this end, including, among other measures, by maintaining relative stability of the dinar exchange rate against the euro.

As in most other countries, inflation in Serbia continued along the upward trajectory. It measured 9.6% y-o-y in April, with food and energy prices still accounting for around two thirds.

Core inflation (headline inflation excluding the prices of food, energy, alcohol and cigarettes) went up reflecting an upturn in imported inflation. Still, measuring 5.5% in April, core inflation remains much below both the core inflation of regional peers and headline inflation at home. In addition to preserved relative stability of the exchange rate, an important factor behind lower and stable core inflation are medium-term inflation expectations of the financial sector, which continued to move within the NBS target tolerance band.

According to the May medium-term projection, inflation will hit a downward trajectory in H2 2022 and return within the target band in H2 2023. As assessed by the Executive Board, the rise in global prices of primary commodities and energy, and higher imported inflation will for some time yet be exerting inflationary pressures, whereafter they are expected to gradually dissipate. The new agricultural season should bring fruit and vegetable prices down from their currently high levels.

Depending on geopolitical developments and the movement in key inflation factors from the domestic and international environment in the coming period, the NBS will assess whether there is a need to tighten monetary conditions further or whether the effects of past tightening ensure a sustainable return of inflation within the target tolerance band over the projection horizon. Delivering price and financial stability in the medium term remains the NBS’s monetary policy priority, while supporting further economic growth and development, a further rise in employment and a favorable investment environment.

(Telegraf Biznis)