NBS keeps key policy rate at 5.75 pct

BELGRADE - The National Bank of Serbia (NBS) decided on Friday to keep the key policy rate at 5.75 pct, as well as the rates on deposit and lending facilities – at 4.5 pct and 7.0 pct, respectively, the central bank said.

"In making the decision, the Board highlighted that the key policy rate has been cut by 75 bp in total since June 2024 and that the effects of past monetary policy easing will play out in the coming period as well.

As underscored by the Board, although inflation has returned to within the target tolerance band and continues to move therein, a cautious monetary policy stance is necessary given the uncertainty in the international environment, notably heightened geopolitical tensions and global market fragmentation.

Such trends may impact the global macroeconomic environment, trade flows and supply chains, with implications for inflation, economic activity and central banks’ monetary policies.

Monetary policy caution is also mandated by the unpredictable global macroeconomic situation that may impact the global prices of energy and other primary commodities. Although the global crude oil price flatlined since mid-October, owing primarily to the expected weak demand for oil from China and solid inventories in the global market, its future movement remains uncertain.

Uncertainty also surrounds the movement of global gas prices, given that Ukraine has banned the transit of gas from Russia to the EU through its territory following the expiration of the agreement.

The record prices for certain agricultural commodities on global stock exchanges – due to droughts in leading producer countries (cocoa in West Africa and coffee in Brazil) – are also fuelling concerns about world food prices.

The reduced supply of agricultural commodities in the domestic market, caused by the drought during summer months, also adds to these worries," it said in a statement.

"Owing to the effects of the NBS’s monetary measures, lower imported inflation, reduced inflation expectations and gradual waning of the impact of external shocks, Serbian inflation has been trending within the target band (3±1.5 pct) since May 2024, slowing to 4.3 pct y-o-y in November and flatlining in December, according to the Statistical Office of the Republic of Serbia estimate.

The downward inflation path in 2024 was achieved mainly thanks to lower energy prices and deceleration of food inflation, as well as lowering of core inflation.

However, similar to countries in the region, Serbia’s core inflation is currently higher and more persistent than the headline, moving slightly above 5 pct.

In the coming period, inflation should continue to move within the target band, supported primarily by the still tight monetary conditions and lower imported inflation.

Core inflation is also expected to slow down going forward and approach the headline gradually.

In its monetary policy decision making, the Executive Board kept in mind that Serbia’s inflation subsided against the background of positive movements in the real sector.

According to the SORS estimate, real GDP grew 3.9 pct in 2024, exceeding the pre-pandemic level by over 18 pct.

Last year’s economic growth stemmed from the pick-up in industry, construction and services. Within industry, manufacturing gave an important contribution, growing by 4.4 pct in 2024, in the face of contracted external demand, primarily from the euro area.

Consistent with movements in the real sector, favourable labour market movements continued, i.e. a further growth in employment, decrease in unemployment and the real wage growth of 9.2 pct in 2024, which preserved the purchasing power of the population.

A record high FDI inflow of over 5 bln euros in 2024 and high government capital expenditure support Serbia’s favourable growth outlook.

Domestic private investments also benefit from better financial conditions owing to the NBS and ECB monetary policy easing and the consequent acceleration of lending activity to 8.0 pct y-o-y in November.

More favourable financial conditions are also underpinned by the lower country risk premium amid an increase in Serbia’s credit rating to investment grade by Standard & Poor’s, which is likely to reflect on a further rise in income disposable for investment and consumption, and hence, on economic growth.

On the other hand, the recovery of demand in our key trade partners remains sluggish, though it is expected to gradually gather pace in the coming period.

This, along with the implementation of investments planned under the Leap into the Future – Serbia Expo 2027 programme and other infrastructure projects, will boost economic activity growth to 4–5 pct in 2025 and the two years that follow," the NBS also said.