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Serbia Monetary Policy March 2022

Serbia: Central Bank holds policy rate steady in March

The National Bank of Serbia (NBS) opted to hold its key policy rate stable at 1.00% at its 10 March meeting. The decision to stand pat met market analysts’ expectations, although Russia’s unprovoked invasion of Ukraine raises the likelihood of rate hikes going forward by driving up inflation. At the March meeting, however, the NBS continued to tighten financial conditions through other means, by raising the weighted average repo rate in reverse repo auctions from 0.75% to 0.90%, and the percentage of excess dinar liquidity withdrawn at those auctions.

In deliberating its decision to keep the key policy rate unchanged, the NBS noted that inflation moved in line with its expectations and that price pressures continued to be buoyed by rising food and energy prices, elements which are outside the scope of monetary policy. The Bank also stated that core inflation was markedly below headline inflation in January, which stood at 8.2%. The relatively stable exchange rate of the dinar vis-à-vis the euro has helped to prevent a stronger rise in core inflation. The Bank now expects inflation to begin decelerating in March and thenceforth until the end of the year. Turning to the economy, the NBS noted that activity at the outset of the year was broadly in line with its expectations. The monetary policy authority sees the economy expanding 4.0%–5.0% this year. That said, the war in Ukraine poses a notable downside risk to GDP growth as it will likely impact key trading partners’ economies, while it poses an upside risk to inflation.

Although the international environment has changed markedly since the last meeting, the Bank struck a relatively similar tone in its press release. The NBS reiterated 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 Erste Group commented:

“Looking ahead, a trade off seems inevitable given alarmingly high inflation on the one hand and deteriorating growth outlook on the other. With almost no space left for further repo rate hikes we expect the NBS will begin to hike its key rate from April in order to keep inflation expectations in check, hence our view of the key rate at 2.00% by year-end.”

The next meeting is scheduled for 7 April.

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