During today’s session, the Executive Board of the National Bank of Serbia (NBS) decided to maintain the benchmark interest rate at 6.50%. The deposit and lending facility rates remain steady at 5.25% and 7.75%, respectively.
The decision to keep the benchmark interest rate unchanged for the ninth consecutive month was primarily influenced by decreasing, yet still notable, global inflationary pressures, the current medium-term inflation forecast, and ongoing uncertainty in the international landscape regarding energy and primary product prices.
The Board also took into account the recent increases in the benchmark interest rate and reserve requirement, expecting their effects to continue influencing inflation in the coming period. The transmission mechanism of monetary policy has proven effective in translating these previous tightening measures into market interest rates, lending rates, and savings rates, alongside a decrease in inflation expectations.
Global Inflation Trends During the decision-making process, the Executive Board considered the continued deceleration of global inflation, with risks regarding its future trajectory becoming more balanced. Many central banks predict with increasing certainty that inflation in their countries will return to target levels in the second half of this year or the first half of the next, given the subsiding inflationary pressures and the effects of restrictive monetary conditions. Caution remains in the eurozone and the United States, indicated by core inflation, which continues to outpace overall inflation primarily due to higher wages.
As a result, the European Central Bank and the Federal Reserve remain cautious about initiating monetary policy easing cycles. The Executive Board of the National Bank of Serbia believes that caution in domestic monetary policy is necessary due to the rise in oil prices on the global market, stemming from the decision of OPEC+ countries to limit supply during the second quarter, amid heightened geopolitical tensions, longer transportation routes, and increased logistical costs.
According to the Executive Board’s announcements, a significant decline in year-on-year inflation in Serbia has persisted this year, reaching 5.6% in February. This decline has been chiefly attributed to the deceleration in year-on-year food price growth, which stood at 4.7% in February, as well as prices of products and services within core inflation (the consumer price index excluding food, energy, alcohol, and cigarettes), which reached 5.2% in February. The Executive Board anticipates further inflation reduction, with a probable return to target levels in May this year, slightly earlier than expected in the latest medium-term inflation projection from February.
Inflation is expected to approach the target’s central value by the end of this year and remain around that level in the medium term. This outlook is supported by the effects of previous monetary tightening, slowing import inflation, still-low external demand, and continued reduction in inflation expectations, which, in the financial sector, are within the National Bank of Serbia’s target range for one year ahead.
Industrial Production Growth Available data in the real sector indicate that performance in the first two months of this year exceeded expectations. Year-on-year industrial production growth in January and February accelerated to around 8%, driven by near 9% growth in manufacturing. Meanwhile, real retail trade turnover increased by 6.4% year-on-year, and growth in tourist arrivals and overnight stays suggests continued positive trends in tourism.
Despite weaker external demand, further progress has been made in foreign trade, with, according to the Statistical Office of the Republic of Serbia, year-on-year export growth of 3.2% in the first two months (led by exports of manufacturing and agricultural products), while imports decreased by 1.3%, reflecting ongoing lower imports of energy.
Taking into account the reduction in global inflationary pressures and gradual recovery in the eurozone, as well as the expected acceleration in the implementation of planned investment projects in transportation, energy, and communal infrastructure, the Executive Board expects the gross domestic product growth rate in 2024 to range between 3–4%, with a central value of 3.5%.
The Executive Board of the National Bank of Serbia emphasizes that future monetary policy decisions will depend on the movements of key inflation factors in the international and domestic environments and the speed of further domestic inflation deceleration. At the same time, decision-making will ensure the preservation of financial stability and favorable prospects for economic growth.
The next session of the Executive Board, at which a decision on the key policy rate will be made, will be held on May 10, 2024.
