The rate on credit facilities is 4.0 percent, and the rate on deposit facilities is 2.0 percent, so the entire interest rate corridor has increased by 25 basis points, the NBS statement stated.
By making this decision, the Executive Board ensures the continuity of a moderate tightening of monetary conditions, thereby adequately reacting to increased inflationary pressures, without jeopardizing the further growth of economic activity.
At the meeting, it was estimated that, in the conditions of continued cost pressures and the growth of imported inflation above expectations, it is necessary to continue with the tightening of domestic monetary conditions.
With this, as they explain, the NBS tries to limit the secondary effects on inflation expectations and ensure that inflation in Serbia finds itself on a downward path, as well as that, by the end of the projection period, it returns to the limits of the permitted deviation from the target.
The continued growth of energy prices on the world market and import inflation, with the effects of drought not only on the domestic market, but also in most of Europe, which are reflected in the further increase in food prices, results in somewhat higher inflation on the domestic market than expected, notes the central Bank of Serbia.
Year-on-year inflation in Serbia in June amounted to 11.9 percent year-on-year, of which about 70 percent of the contribution is due to the increase in food and energy prices.
The growth of imported inflation was also reflected in the growth of base inflation, which in June amounted to 6.7 percent year-on-year, whereby, the NBS points out, that base inflation is significantly lower than overall inflation, but also lower than base inflation in the countries of the region with the same regime monetary policy.
In addition to the preserved relative stability of the exchange rate, an important factor in the lower base inflation is also the medium-term inflation expectations of the financial sector, which continued to move within the limits of the National Bank of Serbia’s target.
According to the Executive Board’s August projection, year-on-year inflation will most likely peak during the current quarter and then follow a downward trajectory.
The current tightening of monetary conditions, the expected weakening of the effects of global factors that led to the growth of energy and food prices in the previous period, as well as lower external demand in conditions of less favorable prospects for global economic growth, will work in the direction of easing inflationary pressures. In the short term, the economic measures adopted by the Government of Serbia, which limit the growth of food and energy prices on the domestic market, will also contribute to calming inflationary pressures.
After the relatively high growth of Serbia’s gross domestic product in the first quarter of 4.4 percent year-on-year, according to the Republic Institute of Statistics, a similar pace of growth continued in the second quarter, with growth of 4.0 percent year-on-year.
Projected GDP growth is still in the range of 3.5 to 4.5 percent
Despite the deteriorating outlook for the growth of the euro zone, production and exports of the processing industry in Serbia continue to grow, which indicates that the reduction in external demand has not had major negative effects on Serbia for now.
Investments in tradable sectors from previous years contributed to this, which significantly increased the export offer, and since May, the export of agricultural products has also increased after the easing of measures temporarily restricting the export of these products.
Bearing that in mind, despite the increasingly pronounced risks that a recession will follow in the euro zone in the second half of the year, the NBS still projects that GDP growth this year will be in the range of 3.5 to 4.5 percent.
The Executive Board estimates that the current tightening of domestic monetary conditions will not have a significant negative effect on economic trends.
Depending on the global geopolitical situation and the movement of key monetary and macroeconomic factors from the domestic and international environment in the coming period, the NBS will assess whether there is a need for additional tightening of monetary conditions.
The next meeting of the Executive Board, where the decision on the reference interest rate will be made, will be held on September 8.
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