Reference interest rate remains at 1%, GDP growth to 5% in 2022

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The reference interest rate of the National Bank of Serbia remains at 1.0 percent, and the Central Bank of Serbia at today’s session of the Executive Board remained with its previous forecast of economic growth for this year and in the medium term ranging from 4.0 to 5.0 percent.

According to the central bank, the NBS continued to reduce the degree of expansion of monetary policy by increasing the weighted average interest rate on reverse repo auctions, and by withdrawing excess dinar liquidity of banks through these auctions.

The weighted average interest rate at the last repo auction held this month was 0.75 percent, and has increased by a total of 64 basis points since October last year, when the process of tightening monetary conditions began.

It was pointed out at the session of the Executive Board that inflation is still mostly driven by higher prices of energy and food, which participated with three quarters in the realized inflation in December 2021 of 7.9 percent year on year.

According to the February medium-term projection, year-on-year inflation in the first quarter of 2022 will be around or slightly above late last year, driven by further cost pressures on energy and other commodity prices, supply disruptions and high global transport costs.

From the second quarter, inflation should be on a declining trajectory and be between 3.5 and 4.0 percent by the end of the year, and then continue to slow towards the central value of the target of 3.0 percent plus / minus 1.5 percent, according to the NBS.

In the short term, the measures of the Government of Serbia on the temporary limitation of the prices of basic foodstuffs and electricity for the economy should contribute to the mitigation of further price growth.

The Executive Board assessed that the domestic economy has maintained strong growth dynamics based on sustainable bases, which will continue despite the reduction of the degree of expansionary monetary policy.

According to the preliminary estimate of the Republic Bureau of Statistics, the growth of the gross domestic product in the last quarter of 2021 amounted to 6.9 percent year-on-year, while at the level of the year the growth estimate is 7.5 percent.

According to the NBS, such trends are the result of the growth of activities in the service sectors and construction, but also in industry, despite the disruption in global supply chains. The negative contribution to growth was recorded only from agricultural production, which was reduced by 5.0 percent due to the drought.

The NBS Executive Board, despite somewhat unfavorable prospects for global economic growth, remained in the assessment of the growth rate of Serbia’s GDP this year and in the medium term will range from 4.0 to 5.0 percent, which will contribute to the continuation of investment cycles and the realization of large infrastructure projects, as well as the growth of personal consumption supported by favorable trends in the labor market.

Regarding the international environment, the NBS notes that the overall environment is still characterized by increased uncertainty regarding the impact of the pandemic and the emergence of new strains of the virus on the pace of global economic growth, global commodity prices and thus inflation.

Regarding the international environment, the NBS notes that the overall environment is still characterized by increased uncertainty regarding the impact of the pandemic and the emergence of new strains of the virus on the pace of global economic growth, global commodity prices and thus inflation.

However, he finds it encouraging that the negative effects of omicron strain coronavirus have so far been less than expected, in part because economies around the world have shown a high degree of adaptation to changing business conditions due to the pandemic. Developments in the international financial market, and thus on capital flows to emerging countries, including Serbia, will continue to be largely determined by the decisions of leading central banks, the US Federal Reserve and the European Central Bank, which, given inflation significantly above the target and pressures from the labor market, he expects that they could tighten monetary conditions to a greater extent than previously expected, according to the NBS.

Decisions of the NBS on monetary policy in the coming period will depend on the movement of factors from the international and domestic environment and the assessment of the intensity and persistence of inflationary pressures based on these factors. In case some of the risks materialize, which could result in inflation above the upper limit of the allowed deviation from the target in the long run, the NBS is ready to react with all available instruments.

The Executive Board adopted the February Inflation Report with new macroeconomic projections, which will be presented to the public on February 18.

The next session of the NBS Executive Board, at which the decision on the reference interest rate will be made, will be held on March 10, Dnevnik reports.