Exactly one month ago, the National Bank of Serbia “pulled the brakes” for the second time in a row and left the benchmark interest rate at July’s 6.5 percent.
Professor Milojko Arsić of the Faculty of Economics in Belgrade said that there is an economic justification for raising the key interest rate one more time by the end of the year, but that this does not mean that the NBS must make such a move at the October meeting of the Executive Board, which is scheduled for today.
“The NBS might want to avoid that (increase), since it is expensive from the point of view of withdrawing liquidity,” said Arsić and reminded that placements in repo transactions are “very large”.
“If repo placements are paid at high rates, the NBS can easily make losses.” However, most central banks are increasing interest rates today despite such effects, because the priority is to reduce inflation”, said our interlocutor.
At the September session, the Executive Board of the NBS justified the decision to keep the reference interest rate at an unchanged level by the continuation of easing of global inflationary pressures, as well as the establishment of a downward trajectory of domestic inflation, which reached a level of 11.5 percent in August.
Professor Arsić, however, points to another reason why the NBS may once again “skip” the increase in the reference rate.
“It seems that our central bank is also looking at the Government of Serbia with one eye, wondering if an increase in the key rate would interfere with the situation when there is talk of elections”, says Milojko Arsić, who believes that the NBS is also late in raising interest rates until the previous elections.
For these reasons, he estimates that the NBS may try to achieve the same goal in a different way – such as increasing the reserve requirement, which it also resorted to at the beginning of September.
“In the first step, such a measure does not affect the increase in interest rates, but banks will later pass it on to the users of their services, considering that the cost of reducing liquidity is passed on to commercial banks, since the interest rates on required reserves are low,” explains Arsić.
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