NBS keeps key policy rate unchanged

BELGRADE - The National Bank of Serbia (NBS) Executive Board decided on Thursday to keep the key policy rate on hold at 5.75 pct, and the deposit (4.5 pct) and lending facility (7.0 pct) remained unchanged as well.

"When making the decision, the Board noted that central banks worldwide, including the NBS, continue to face marked uncertainty regarding protectionist measures of leading world economies and their impact on inflation and economic growth," the central bank said in a statement.

"Estimates prevail that, in such circumstances, the pace of decline in global inflation remains uncertain, while economic growth will most probably be subdued due to disruptions in trade flows and production chains, as well as the globally heightened risk aversion which will negatively affect investment and consumption. Inflation at home also depends on the still highly volatile movements in international commodity and financial markets. Though global prices of primary commodities, especially oil, have receded due to expectations of slower global growth, caution is needed as increased production costs amid higher tariffs could produce inflationary effects.

The Board also took into account the ECB’s continued accommodative stance in June, which should reflect on more favourable euro-indexed lending in Serbia, while the current announcements suggest that the Fed will be more cautious in monetary policy easing going forward. Such Fed’s decisions could be prompted by the emergence of heightened inflationary pressures due to additional tariffs imposed, which could also affect capital flows toward emerging economies. The prices of some food inputs in the global exchanges (cocoa and coffee) that recently reached their maximum levels, as well as the effects of last year’s drought, affected domestic food prices over the past months, but the situation will likely stabilise with the onset of the new agricultural season.

Consistent with the NBS’s expectations, y-o-y inflation continued to move within the target band, having slowed to 3.8 pct in May. Inflation slowdown since the beginning of the year resulted from lower contributions of energy and services prices, while the contribution of food prices increased. The easing of inflationary pressures is also signalled by core inflation, having decelerated to 4.6 pct y-o-y in May, and by other inflation measures.

Inflation will likely remain at a similar level by mid-year, slow down thereafter and approach the target midpoint of 3 pct by year end, hovering around that level until the end of the projection horizon. Such inflation trends will be mostly determined by the still tight monetary conditions, lower import inflation, reduced global energy prices and the new agricultural season, assuming an average outturn. Factors exerting downward pressures on inflation will be the expected movements in real wages consistent with productivity growth, which should contribute to a further slowdown of core inflation and its convergence to headline inflation," it said.