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Serbia Monetary Policy February 2022

Serbia: Central Bank holds policy rate in February

The National Bank of Serbia (NBS) stood pat at its 10 February meeting and left the key policy rate unchanged at its all-time low of 1.00%. The decision, which met market analysts’ expectations, was accompanied by financial tightening through other means. The Bank increased the weighted average interest rate in reverse repo auctions to 0.75%, driven by heightened cost-push pressures at home and abroad.

In deliberating its decision to keep the main monetary policy tool unaltered, the Bank noted that inflation “is still mostly driven by supply-side factors” that largely lay outside of its scope. Moreover, greater energy and food prices have pushed up price pressures recently, but the Bank still expects inflation to begin trending downwards from the second quarter onwards, before settling within the 3.5%–4.5% target range at the end of the year. Regarding the economy, the monetary policy authority stated that it expects the economy to continue growing robustly despite tighter financial conditions, aided by a pickup in the services and industrial sectors as well as in construction.

The Bank stated that it maintained a cautious approach due to the impacts of geopolitical tensions and greater energy demand on international commodity prices. As such, the Bank commented that “monetary policy decisions in the period ahead will depend on the movement of factors in the international and domestic environment and the assessment of intensity and durability of inflationary pressures stemming from those factors.”

Analysts at the EIU added:

“Since late 2020 [the reverse repo rate] has been raised […] and we expect this to remain the policy tool of choice over the next few months, with further modest hikes until it reaches the 1.00% key policy rate (political pressure not to raise the key rate in advance of elections in April will also be a factor). The NBS’s expectation is that fading base effects and diminishing supply-chain bottlenecks will return inflation close to target by late 2022. This seems credible, but with inflation having consistently surprised to the upside since mid-2021, and with ongoing uncertainty over virus and supply-side developments, there are clear forecast risks. We expect a first rise in the key rate by mid-2022, with the NBS gradually tightening its policy stance into 2023 amid higher overall price levels and a steadily firming trend in underlying demand.”

The next meeting is scheduled for 10 March.

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