The Executive Board of the National Bank of Serbia decided, at today’s session, to keep the key policy interest rate at 6.50%. Interest rates on deposits (5.25%) and lending facilities (7.75%) were also maintained at unchanged levels.
The decision of the Executive Board to keep the key policy interest rate unchanged was influenced by further reduction in global inflationary pressures, as well as the established downward trajectory of domestic inflation and its expected return within the target range by the middle of this year.
What influenced this decision?
In making the decision, consideration was given to the fact that in the previous period, the reference interest rate and mandatory reserve rates had increased, and the effects of these measures would continue to transmit to inflation in the coming period. The transmission of the previous tightening of monetary policy to interest rates in the money market, loans, and savings, as well as the decline in inflation expectations of the financial sector and the economy one year ahead, indicates the effectiveness of the transmission mechanism of monetary policy.
In making the decision, the Executive Board took into account the ongoing easing of cost pressures and the reduction of inflation globally. Also, although the world economy ended the previous year slightly better than expected, global economic growth is below the long-term average and will be slower this year, increasing expectations that leading central banks, such as the European Central Bank and the Federal Reserve System, may start easing monetary policies somewhat earlier.
However, labor market pressures remain strong, and leading central banks highlight them as a key factor requiring caution in monetary policy management. In addition, prospects for macroeconomic developments in China, due to their impact on global trade and world prices of primary products, as well as ongoing geopolitical tensions, continue to be crucial sources of uncertainty that require caution in monetary policy management.
Inflation is decreasing
The Executive Board emphasized that year-on-year inflation in Serbia continued to decrease in line with the projection of the National Bank of Serbia. According to the estimate of the Republic Statistical Office, it fell to 7.6% in December, which is almost half of the rate at the end of 2022. Similar to previous months, the reduction in inflation was primarily attributed to measures of monetary policy, easing global cost pressures, reduced import inflation, and a good agricultural season.
The Executive Board highlighted that core inflation (consumer price index excluding food, energy, alcohol, and tobacco) remained significantly lower throughout the year compared to the overall inflation, thanks to the implemented measures of monetary policy. In the coming period, the Executive Board expects further inflation reduction, with a return to the target range by mid-year and then approaching the central target value of 3% by the end of the year. This will be influenced by the effects of tightening monetary conditions, slowing import inflation, and the anticipated further decline in inflation expectations.
GDP Growth
According to the estimate of the Republic Statistical Office, the growth of gross domestic product (GDP) in 2023 amounted to 2.5%, aligning with the projection of the National Bank of Serbia. Growth was achieved in all production and service sectors, with the energy sector, agriculture, and construction experiencing the highest growth due to intensified implementation of infrastructure projects. Despite external demand slowing down, the manufacturing industry demonstrated resilience, achieving growth in production and exports.
Favorable trends continued in the labor market, with further increases in employment, a decrease in unemployment, and real wage growth. The average wage increased nominally by 15.0% during the year, while its real growth was approximately at the level of the real GDP growth, amounting to 2.6%. This confirms the preservation of the purchasing power of the population.
Assuming a reduction in global inflationary pressures, the recovery of the eurozone, and the expected acceleration in the implementation of planned investment projects in the transportation, energy, and municipal infrastructure sectors, the Executive Board expects GDP growth to accelerate to 3.0–4.0% this year. According to the Executive Board’s assessment, a significant factor in growth will be personal consumption, albeit not to an extent that would lead to significant inflationary pressures. Additionally, investments in fixed assets that increase production potential will contribute to growth.
The National Bank of Serbia will continue to monitor and analyze the movement of key inflation factors from domestic and international environments and make decisions based on the projected inflation trends. Simultaneously, it will consider maintaining financial stability and ensuring support for continuous economic growth, further employment growth, and a favorable investment environment.
The next meeting of the Executive Board, where decisions on the reference interest rate will be made, is scheduled for February 8, 2024.
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