Serbia’s central bank left its key interest rate steady for the fifth time and said the rising trend of global commodities called for “cautious monetary policy conduct” while past fiscal and monetary measures will continue to maintain favorable financial conditions amid stronger-than-expected first quarter growth.
The National Bank of Serbia (NBS) kept its key policy rate at 1.0 percent, unchanged since it was cut in December as the central bank wrapped up last year’s four cuts that totaled 125 basis points.
Last year’s easing measures extended the bank’s easing cycle since November 2013 during which the rate was cut 28 times and by a total of 10.25 percentage points.
In addition to the rate cuts, Serbia’s government was aggressive in its response to the COVID-19 pandemic, passing fiscal packages worth some 8.5 percent of gross domestic product last year. It has proposed a third package worth around 4.3 percent of GDP this year to support economic recovery.
The result of the stimulus was the contraction in Serbia’s economy last year was limited to around 1 percent, one of the smallest in Europe, and economic activity already returned to pre-COVID levels in the first quarter of this year when GDP grew 1.2 percent year-on-year, boosted by exports.
With vaccinations under way and the service sector expected to recover, NBS forecast growth this year of 6 percent based on the results of the first quarter, above the bank’s initial projections and the International Monetary Fund’s April estimate of 5 percent.
Serbia’s headline inflation rate jumped to 2.8 percent in May from 1.8 percent in April and NBS said it expects a “somewhat” higher rate in May as well but said this rise is temporary and reflects the low 2020 base and the pandemic-related collapse in global oil prices.
NBS targets inflation of 3.0 percent, plus/minus 1.5 percentage points.
A core inflation rate of 1.8 percent signals the absence to any major demand-side inflationary pressures, the bank said, adding it expects a stable movement around the current level in the period ahead.
“The Executive Board emphasizes the importance of cautious monetary policy conduct, mainly in view of uncertainty in the global commodity market – the rising trend in prices of oil, primary agricultural commodities and food, which has been in place for quite a while,” NBS said.
The May inflation report will be published on May 19.
The National Bank of Serbia issued the following press release:
“At its meeting today, the NBS Executive Board voted to keep the key policy rate at 1.0%.
As assessed by the Board, the effects of past monetary and fiscal measures can be expected going forward, helping maintain the favourable financing conditions of businesses and households, and propping up their disposable income. A boost will also come from the adopted third stimulus package worth around 4.3% of GDP this year.
The Board stressed that our economy outperformed expectations early this year as well. It reached the pre-crisis level earlier than many world economies – already in Q1 this year versus Q2 as initially forecast. According to the Serbian Statistical Office, Q1 saw GDP growth of 1.2% y-o-y. The major impetus, as assessed by the NBS, came from net exports. As in the years before, exports remained diversified geographically and product-wise, reflecting a robust FDI inflow mainly to tradable sectors. As investment and consumer confidence has been preserved and infrastructure projects are unfolding, fixed investment and consumption are also on the path of recovery. An additional impulse is expected from the third fiscal stimulus for businesses and households and higher planned government capital expenditure. We expect that the continued successful vaccination and the recovery of services still affected by the pandemic will help achieve GDP growth of 6%, which is above our initial projections owing to the GDP growth recorded in Q1.
Y-o-y inflation was low in Q1 (1.4% on average). The seasonal vegetable price rise did not take place in Q1, but this was offset in April, when y-o-y inflation was pushed to 2.8%. The Executive Board expects a somewhat higher inflation rate in May as well. This rise will be temporary and will reflect the low 2020 base, primarily for petroleum products, which is also the case in most other countries due to the last year’s pandemic-related collapse of global oil prices. At the same time, low core inflation of 1.8% signals the absence of any major demand-side inflationary pressures and the Executive Board expects that its stable movement around the current level will persist in the period ahead. The ensured relative stability of the exchange rate remains an important factor of low and stable inflation, as do the anchored inflation expectations of the financial and corporate sectors, which confirm monetary policy credibility.
In making the rate decision, the Executive Board kept in mind that the movements in the international environment are still largely dependent on the course of the pandemic. While global growth slowed down in Q1 2021 due to the deterioration of the epidemiological situation, it turned out higher than previously expected. This is mainly the result of increasingly improved adjustment of company business and household consumption to containment measures and limited mobility, as well as of additional fiscal measures of some countries, primarily the USA. A faster than expected economic recovery and the pick-up in inflation have not, for the time being, softened the stimulus measures of the majority of central banks worldwide, because the factors which drove higher inflation rates early this year are assessed to be temporary in nature. Better growth outlook for the global economy has to some extent mitigated uncertainty in the international financial market and the recent increase in long-term interest rates in the USA has so far not had any significant impact on financing conditions of emerging economies, which remain favourable. The Executive Board emphasises the importance of cautious monetary policy conduct, mainly in view of uncertainty in the global commodity market – the rising trend in prices of oil, primary agricultural commodities and food, which has been in place for quite a while.
The Executive Board stresses that, as so far, monetary policy priority will be to ensure price and financial stability, while supporting faster growth of our economy and employment, further growth of exports and a favourable investment environment. The NBS will continue to carefully monitor the trends and impact of the key factors in the domestic and international environment on inflation, financial stability and the speed of economic recovery, and to adjust its measures accordingly, in the interest of our corporates and citizens.
At today’s meeting, the Executive Board adopted the May Inflation Report, to be published on 19 May. Apart from inflation and GDP projections, the Inflation Report offers detailed explanations of monetary policy decisions and the underlying macroeconomic movements.
The next rate-setting meeting is scheduled for 10 June.”
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