Serbia Monetary Policy July 2022

Serbia

Serbia: Central Bank continues hiking cycle in July with 25 basis point rate increase

July 7, 2022

At its 7 July meeting, the National Bank of Serbia (NBS) hiked the key policy rate by 25 basis points from 2.50% to 2.75%. The decision marked the fourth consecutive interest rate increase, bringing the cumulative increase to 175 basis points since 7 April. The Bank’s decision was not in line with market analysts’ expectations: Most had anticipated the NBS to hike the rate to 3.00%. The NBS also raised the lending facility rate and the deposit facility rate by 25 basis points to 3.75% and 1.75%, respectively.

In deliberating its decision, the NBS pointed to persistently high price pressures on the back of elevated energy, agricultural and industrial commodity prices. The Bank said that prolonged supply chain issues will keep inflation “on an upward path for quite some time yet.” Therefore, it tightened financial conditions to limit second-round effects on inflation expectations and to try and bring domestic inflation on a downward trajectory from August onwards. Subsequently, the NBS expects inflation to return to the 1.5–4.5% target range in the second half of 2023. Regarding the economy, the Bank expects the Serbian economy to grow 3.5–4.5% this year and by 4.0–5.0% per year in the medium-term; the NBS noted that the weaker global growth outlook and cooling economic momentum in the Euro area have not yet negatively impacted the domestic economy.

The NBS did not explicitly state the direction of monetary policy going forward. It indicated that further hikes are possible depending on the development of the conflict in Ukraine and on price pressures. Our panelists expect the NBS to continue its tightening cycle going forward amid sustained price pressures.

Mate Jelic, analyst at Erste Bank, added:

“The NBS clearly wants to keep the monetary impulse to growth for as long as possible. Somewhat surprising recent dinar appreciation pressures give the CB maneuvering space to slow the pace of its hiking cycle, while likely hoping for inflation to roll over after the summer. We expect to see another hike on next month’s meeting while a significant deterioration in inflation outlook would be needed for the hiking cycle to continue after that.”

The next meeting is scheduled for 11 August.

The NBS did not explicitly state the direction of monetary policy going forward. It indicated that further hikes are possible depending on the development of the conflict in Ukraine and on price pressures. Our panelists expect the NBS to continue its tightening cycle going forward amid sustained price pressures.

Mate Jelic, analyst at Erste Bank, added:

“The NBS clearly wants to keep the monetary impulse to growth for as long as possible. Somewhat surprising recent dinar appreciation pressures give the CB maneuvering space to slow the pace of its hiking cycle, while likely hoping for inflation to roll over after the summer. We expect to see another hike on next month’s meeting while a significant deterioration in inflation outlook would be needed for the hiking cycle to continue after that.”

The next meeting is scheduled for 11 August.

FocusEconomics panelists project the key policy rate to end 2022 at 3.55% and 2023 at 3.61%.


Author:, Economist

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