The Executive Board of the National Bank of Serbia decided at its session on August 10th to keep the reference interest rate at the level of 6.50 percent. The second respite in raising the benchmark interest rate this year after the one in May, combined with new data on slowing inflation, opened the question of whether the end of monetary tightening is in sight?
The Executive Board of the NBS explained the decision not to raise the reference interest rate by the continuation of the easing of global inflationary pressures, and it was announced that this should contribute to a significant drop in imported inflation. It was also stated that the downward path of domestic inflation is expected to continue and its return to the target limits in the monetary policy horizon.
“When making the decision, it was also taken into account that monetary conditions were tightened in the previous period and that it is now necessary to assess the full effects of previously implemented measures,” the National Bank announced.
Then, later this month, the Central Bank published an inflation report in which it was stated that year-on-year inflation in Serbia is expected to be at a level of around eight percent at the end of 2023.
“Year-on-year inflation in Serbia is on a downward path and in July it was 12.5 percent, which is 3.7 percentage points lower compared to March, when it reached its peak.
At the same time, data on base inflation, which was lowered from 11 3 percent in March to 9.4 percent in July, indicates that the slowdown in inflation is due not only to the drop in world energy and food prices, but also to the monetary policy measures taken by the NBS,” said NBS Governor Jorgovanka Tabaković.
Economist Saša Đogović told Euronews Serbia that respite in the “tightening” of credit and monetary policy will now be a little more frequent, but that he certainly expects the reference interest rate to be raised by the end of the year.
“It is certainly not the end of the monetary tightening, it is a short-term intermezzo and the NBS will certainly be forced to tighten its already restrictive credit-monetary policy again,” said Đogović and added that the linear giving of 10,000 dinars to a certain category of the population will also affect it.
What affects the “spiral” of inflation
Experts say that inflation in Serbia certainly has a downward trend, but that it is still extremely high since it is 5.5 percent in the Eurozone according to the latest data. And Professor Hanić believes that inflation has not slowed down enough, especially base inflation, to give up on further monetary “tightening”.
“There are estimates that, based on the fall in prices of imported products, a little later there will be a positive effect on lowering prices, that is, reducing inflation, but these other unpredictable factors also appear,” said Hanić.
“It is the so-called spiral that opens for psychological reasons – expectations, anticipation of the future movement of prices in an upward direction,” concluded Hanić.
Inflation persistent in both Europe and the USA
On July 27th, the European Central Bank raised the reference interest rate by another 25 basis points, to 4.25 percent. The ECB decided to raise the interest rate for the ninth time in a row, and it is now the highest since October 2008. The interest rate on deposits is now 3.75 percent, which is the highest in the past 22 years.
Since the start of the tightening cycle in July 2022, ECB officials have raised interest rates by 425 basis points, the fastest pace of tightening in its history. According to the ECB’s website, inflation in the Eurozone is falling, but at too slow a pace, and it is expected to remain above the ECB’s desired goal of 2.0 percent for a long time.
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