National Bank increases key policy rate to 4 percent

NEWS 06.10.2022 15:23
Source: N1

The National Bank of Serbia (NBS) Executive Board raised Thursday the key policy rate by 50 bp, to 4 percent, said the NBS.

The rates on deposit and credit facilities were also raised by 50 bp, to 3 percent and 5 percent, respectively. Amid continued, primarily global, cost-push pressures and rising imported inflation, the Executive Board voted to further raise the key policy rate and continue to tighten monetary conditions, said the NBS.

As it was explained, by making this decision, in an environment of the prevailing inflationary impact of supply-side factors on which monetary policy measures have little or no influence at all, the NBS aims to contain the inflationary effect of demand-side factors and the second-round effects of rising food and energy prices on other prices through inflation expectations.

The NBS strives to ensure that inflation hits a downward trajectory and returns within the target tolerance band until the end of the projection horizon.

The Executive Board highlighted that the NBS has been incrementally but continuously tightening monetary conditions in the domestic market since October last year, while also focusing on economic growth.

Today’s increase in the key policy rate is the seventh in a row. Since April this year, the rate has been raised by 300 bp said the National Bank.
The NBS said that, in addition to raising the main interest rates and tightening the conditions of dinar liquidity, it significantly contributes to price stability in the medium run by maintaining the relative stability of the dinar exchange rate against the euro, by limiting the spillover of elevated import prices on domestic prices.

Regarding inflation, the Board expects it to move largely in line with the latest, August NBS projection, according to which y-o-y inflation will peak most probably in September and decline below its current figure by the year end. It is expected to continue down in the course of next year, and return within the target band by the end of the projection horizon.

Inflationary pressures will subside owing to past monetary tightening, the expected waning of the effects of global factors driving up the energy and food prices in the past period, and lower external demand amid a gloomier global growth outlook.

In the near term, inflationary pressures will calm also on account of the government economic measures capping the rise in food and energy prices in the domestic market, said the NBS.

In an environment of global slowdown and mounting recessionary pressures in the euro area, our most important economic partner, we anticipate that domestic economic activity will slow in the remainder of this and early next year, said the NBS.

“In H1 2022 the GDP growth rate was relatively high, at 4.1 percent y-o-y. At the year-level, the Executive Board projects it will move within a 3.5–4.5 percent range, though there are downside risks stemming from potentially weaker than expected growth in the euro area and our other important trade partners, including a less favorable agricultural season at home,” said the NBS.

Still, according to the assessment of the NBS Executive Board, stronger export supply, supported by investment in tradable sectors in earlier years, will offset, to an extent, the effect of dented external demand on manufacturing exports, as confirmed by the continued, two-digit y-o-y growth in goods exports in July and August.

The next NBS Executive Board rate-setting meeting will be held on 10 November.