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Serbia Monetary Policy October 2021

Serbia: Central Bank holds policy rate in October, but takes first step towards policy normalization

The National Bank of Serbia (NBS) left the key policy rate unchanged at its all-time low of 1.00% at its 7 October meeting. While this marked the ninth consecutive hold, the Bank did take its first step towards normalizing monetary policy: The NBS raised the average repo rate by 13 basis points from 0.11% to 0.24% at the 6 October reverse repo auction. It also decided to terminate repo securities purchases—which provide liquidity to commercial banks under very favorable conditions—from October.

In deliberating its decision, the Bank noted that the recent rise in inflation is partly due to an unfavorable base effect brought about by the pandemic, as well as supply-side issues, which “monetary policy cannot affect”. Low and stable core inflation highlights that the recent rise in price pressures has been driven by supply-side factors, which include disruptions to production chains and higher commodity prices, as well as adverse weather conditions weighing on food production. Looking ahead, the Bank expects inflation to rise further in the coming months, before the subsiding base effect and the fading impact of higher commodity prices bring inflation back to the target range, and then to below the midpoint in the second half of 2022.

The NBS restated that it “will keep a close eye on developments in the domestic and international environment, ready to respond, if needed, by all monetary policy instruments on hand, with a view to maintaining monetary and financial stability”. While this could suggest further tightening ahead, the Bank sounded cautious and noted that action by the U.S. Federal Reserve or the European Central Bank could negatively affect capital inflows to Serbia. The majority of panelists polled by FocusEconomics expect the Bank to stand pat throughout the remainder of this year, before tightening financial conditions next year. The next meeting is scheduled for 9 November.

Commenting on the outlook, Mate Jelic, analyst at Erste Bank, added:

“The NBS continues to keep the key rate at bay notwithstanding inflation prints in the upper part of the target range. The Central Bank could soon be forced to choose between hiking rates and risking unwanted growth developments in the short term or being forced to burn through its FX reserves in order to keep the dinar stable as Serbia could soon have one of the lowest carry rates in the region.”

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