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Serbia, Returning inflation to a downward trajectory is a priority

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The Executive Board of the National Bank of Serbia decided to increase the reference interest rate by 25 basis points, to the level of 6.25%. The rate on deposit facilities was also increased – to 5%, as well as the rate on credit facilities – to 7.5%.

The Executive Board of the NBS estimated that it is still necessary to continue with a moderate tightening of monetary conditions in order to prevent inflationary expectations from rising and to ensure that inflation finds itself on a downward path and returns to the limits of the permitted deviation.

At the same time, by maintaining the relative stability of the exchange rate of the dinar against the euro, the National Bank of Serbia contributes to limiting the spillover effects of import price growth on domestic prices.

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Inflationary pressures at the global level continue to cause concern even though world energy prices, primarily electricity and gas, but also other primary products have decreased, and indicators that point to disruptions in global supply chains and container transport costs have almost completely returned to the levels before pandemic.

The Executive Board stated that inflation is gradually decreasing in a large number of countries, but that the levels at which it is still relatively high. At the same time, core inflation is declining more slowly than overall in many countries.

This is also evidenced by the fact that the leading central banks, the European Central Bank and the Federal Reserve System, increased their reference interest rates again in May.

This should contribute to the expected further weakening of global inflationary pressures.
The Executive Board emphasizes the necessity of conducting a cautious monetary policy, primarily due to the uncertainty regarding the duration of the conflict in Ukraine and the availability and prices of energy in the coming period.

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Inflation reached its peak in March and slowed down in April to 15.1% year-on-year, mostly under the influence of the slowdown in the growth of food prices, which contributed the most to inflation in the previous period.

According to the current projection, the Executive Board expects that year-on-year inflation will continue to move on a downward path, with a significant drop in the second half of this year. Inflation is expected to reach the target of 3±1.5% in the middle of next year.

When it comes to economic activity, the real year-on-year growth of gross domestic product in the first quarter of 2023 was 0.7%, which was also the preliminary estimate of the Republic Institute of Statistics.

Driven by the growth of the energy and mining sectors, industrial production achieved year-on-year growth of 1.9% in the period January-April 2023. Foreign trade exchange continued to record favorable trends in April as well – merchandise exports expressed in euros in April increased by 5.6% year-on-year, while merchandise imports expressed in euros decreased by 14.8% year-on-year.

In the rest of the year, the National Bank of Serbia expects an acceleration of economic activity, to which the recovery of external demand from the euro zone should also contribute.

The priority of monetary policy will continue to be ensuring price and financial stability in the medium term, with support for further growth and development of the economy, as well as further growth of employment and preservation of a favorable investment environment.

The next session of the Executive Board, where the decision on the reference interest rate will be made, will be held on July 13, 2023, according to the NBS announcement.


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