Serbia: Central Bank holds policy rate steady in March
At its meeting on 7 April, the National Bank of Serbia (NBS) delivered a bigger-than-expected rate hike, bringing the key policy rate up by 50 basis points to 1.50% from 1.00%. The decision overshot market analysts’ expectations of a 25 basis point hike, and marked the first time since February 2013 that the rate has been raised. That said, the Bank had previously raised the weighted average repo rate in reverse repo auctions to nearly the same level as the pre-decision policy rate, and at this same meeting it also increased the interest rate on deposit and lending facilities to 0.50% and 2.50%, respectively.
The decision to hike the main monetary policy tool was driven by higher-than-expected and persistent inflationary pressures at home and abroad. This, according to the Bank, called “for additional monetary tightening in order to contain second-round effects on inflation expectations.” Price pressures have been rising since mid-2021 due to the global commodity price rally and the impact of drought in the country on food production, dynamics exacerbated by uncertainty surrounding Covid-19 restrictions and the war in Ukraine. Energy and agricultural commodity prices have been pushed higher as a consequence. With the balance of risks for inflation skewed to the upside, “the Executive Board still judges that inflation will have a falling trajectory by the end of the year.”
Regarding the economy, the Bank expressed that domestic economic activity should not be significantly impacted by the tightening of financial conditions. That said, the balance of risks for the growth outlook is tilted to the downside side and depends crucially on the length of the war in Ukraine. Lastly, the U.S. Federal Reserve’s commencement of a tightening cycle and the European Central Bank’s decision to trim the volume of quantitative easing in Q2 likely provided further reasons for the NBS to hike its policy rate in order to prevent a negative impact on capital inflows. At its meeting on 7 April, the National Bank of Serbia (NBS) delivered a bigger-than-expected rate hike, bringing the key policy rate up by 50 basis points to 1.50% from 1.00%. The decision overshot market analysts’ expectations of a 25 basis point hike, and marked the first time since February 2013 that the rate has been raised. That said, the Bank had previously raised the weighted average repo rate in reverse repo auctions to nearly the same level as the pre-decision policy rate, and at this same meeting it also increased the interest rate on deposit and lending facilities to 0.50% and 2.50%, respectively.
The decision to hike the main monetary policy tool was driven by higher-than-expected and persistent inflationary pressures at home and abroad. This, according to the Bank, called “for additional monetary tightening in order to contain second-round effects on inflation expectations.” Price pressures have been rising since mid-2021 due to the global commodity price rally and the impact of drought in the country on food production, dynamics exacerbated by uncertainty surrounding Covid-19 restrictions and the war in Ukraine. Energy and agricultural commodity prices have been pushed higher as a consequence. With the balance of risks for inflation skewed to the upside, “the Executive Board still judges that inflation will have a falling trajectory by the end of the year.”
Regarding the economy, the Bank expressed that domestic economic activity should not be significantly impacted by the tightening of financial conditions. That said, the balance of risks for the growth outlook is tilted to the downside side and depends crucially on the length of the war in Ukraine. Lastly, the U.S. Federal Reserve’s commencement of a tightening cycle and the European Central Bank’s decision to trim the volume of quantitative easing in Q2 likely provided further reasons for the NBS to hike its policy rate in order to prevent a negative impact on capital inflows.
While the Bank did not explicitly indicate the direction of monetary policy going forward, greater upside risks to inflation should see further tightening later in the year. While the NBS restated 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 the intensity and persistence of resulting inflationary pressures”, it dropped its prior statement that it “stands ready to respond using all available monetary policy instruments” as needed.
Mate Jelic, analyst at Erste Bank, added:
“After years of favorable macro tailwinds, the situation deteriorated rapidly […]. Faced with high inflation and deteriorating growth prospects, the CB will likely look to address the former first and foremost, as otherwise they risk de-anchoring of inflation expectations, losing their credibility and ultimately undermining the effectiveness of future monetary policy moves. We expect more hikes are coming and see the key rate at 2.00% by year-end. Risks are skewed towards the upside as we forecast average yearly CPI this year close to double-digit area.”
The next meeting is scheduled for 12 May.
While the Bank did not explicitly indicate the direction of monetary policy going forward, greater upside risks to inflation should see further tightening later in the year. While the NBS restated 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 the intensity and persistence of resulting inflationary pressures”, it dropped its prior statement that it “stands ready to respond using all available monetary policy instruments” as needed.
Mate Jelic, analyst at Erste Bank, added:
“After years of favorable macro tailwinds, the situation deteriorated rapidly […]. Faced with high inflation and deteriorating growth prospects, the CB will likely look to address the former first and foremost, as otherwise they risk de-anchoring of inflation expectations, losing their credibility and ultimately undermining the effectiveness of future monetary policy moves. We expect more hikes are coming and see the key rate at 2.00% by year-end. Risks are skewed towards the upside as we forecast average yearly CPI this year close to double-digit area.”
The next meeting is scheduled for 12 May.