The Executive Board of the National Bank of Serbia (NBS) announced its decision to maintain the benchmark interest rate at 6.5% following its meeting today. This decision was accompanied by the retention of deposit and lending facility interest rates at 5.25% and 7.75%, respectively.
The board’s choice to uphold the key policy rate at its current level reflects considerations of medium-term inflation projections and expectations surrounding key inflation drivers, particularly amid declining but still noteworthy global inflationary pressures and considerable uncertainty regarding world energy and primary product prices, exacerbated by geopolitical tensions.
In reaching this decision, the Board took into account the transmission effects of previous monetary policy tightening, which notably impacted private sector borrowing costs and volumes. Notably, financial conditions have stabilized since the last key policy rate increase in July of the previous year.
Furthermore, while global inflation remains elevated, it is gradually decelerating, with risks associated with its future trajectory becoming increasingly balanced. Most central banks anticipate a return to target inflation levels in the latter half of this year or the first half of the next, attributed in large part to previous monetary tightening measures, which appear to have run their course.
Despite elevated core inflation levels amid tight labor market conditions, there are expectations that the European Central Bank will commence interest rate cuts in June, likely leading to a gradual reduction in the cost of euro-denominated borrowing domestically. However, the Federal Reserve is expected to delay similar actions for some time.
Given the volatile movements of global primary product prices, particularly oil prices, driven by geopolitical tensions and OPEC supply constraints, the cautious stance of the National Bank of Serbia’s monetary policy remains essential.
The Executive Board highlighted that year-on-year inflation in Serbia continues to decelerate, even surpassing projections by the National Bank of Serbia, reaching five percent in March. Core inflation has also slowed under the influence of previous monetary policy tightening, aligning with overall inflation levels. Factors contributing to this deceleration include slower growth in food prices and decreasing inflation expectations within the financial sector and the broader economy for the year ahead.
Looking ahead, the Executive Board anticipates further inflation deceleration and its return to target levels, likely by May of this year, slightly earlier than previously projected. First-quarter real sector performance exceeded expectations, with restrictive monetary conditions having no significant adverse effects on economic activity.
Real GDP growth accelerated to 4.6 percent year-on-year, driven by increased activity in trade, industry, and construction, along with positive contributions from other service sectors.
The Executive Board reaffirmed its commitment to monitoring and analyzing domestic and international market trends, making future monetary policy decisions contingent on the pace of inflation deceleration while ensuring the preservation of financial stability and favorable economic growth prospects.
The May Inflation Report, including new macroeconomic projections, will be presented in detail to the public at a press conference on May 14, where additional explanations and monetary policy decisions will be provided. The next meeting of the Executive Board, where the decision on the key policy rate will be made, is scheduled for June 13, 2024.
