NBS Keeps Rate at 5.75%, September Inflation Seen Near 4%
The Executive Board held the key rate at 5.75 percent, with deposit facility at 4.5 and lending facility at 7.0 percent. July inflation eased to 1.9 percent; NBS sees it near 4 percent in September.
- The key policy rate stays at 5.75 percent, with the deposit facility at 4.5 percent and the lending facility at 7.0 percent.
- Year on year inflation slowed to 1.9 percent in July, and the central bank expects it near 4.0 percent in September because of a low statistical base.
- The Inflation Report is due on August 19, and the next Executive Board meeting is set for September 10.
The key policy rate of the National Bank of Serbia (NBS) stays at 5.75 percent. The Executive Board made that call at its meeting on August 13, and the rates around the corridor were left unchanged as well: the deposit facility at 4.5 percent and the lending facility at 7.0 percent. The cost of money for banks, and by extension for holders of dinar loans tied to the key rate, does not change on this count.
The statement issued after the meeting spells out what weighed most on the board.
The Executive Board primarily took into account the realized and expected movement of inflation in the coming period, as well as risks from the international environment that could affect it.
Year on year inflation dropped below the 3 percent target midpoint in June, then slowed further to 1.9 percent in July. The central bank’s target sits at 3 percent, with a tolerance band of 1.5 percentage points on either side, so the July reading sat near the lower edge of that range. For monetary policy that is a comfortable spot, but only for as long as it lasts.
Why did inflation come in lower than expected?
The answer sits in the fruit and vegetable basket. The NBS says a strong harvest pushed down prices for those products and pulled overall inflation below the earlier projection. We covered this when the July figures came in: vegetables got 15.1 percent cheaper that month, and that single item pulled the whole index down. It is a factor the key rate cannot control, and one that fades with the season.
Why is inflation expected to reach 4 percent in September?
The central bank expects year on year inflation to land near 4.0 percent in September. The reason is not fresh price increases but a low base from last year, when a government cap on retail markups pushed prices down, so the comparison with that month now produces a higher percentage. The jump from 1.9 to around 4 percent within two months does not, by itself, signal a turn in price trends. It reflects the statistical footprint of last year’s measure.
On the international front, the Executive Board singles out geopolitical tensions in the Middle East. If the conflict drags on, the effects could spill into production and transport costs, supply chains and capital flows, and Serbia, as an energy importer, imports those costs along with its oil. The NBS says it will respond with all available instruments if a rise in world oil prices produces stronger secondary effects through inflation expectations.
What is coming before the next meeting
The August Inflation Report, with updated macroeconomic projections, will be presented to the public on August 19. That is when it becomes clear how far the projection has been lowered compared with the May report, and for banks and importers that figure matters more than the rate decision itself. The next Executive Board meeting, where the key rate will be reviewed again, is scheduled for September 10.
The foreign exchange market shows no move that would change the arithmetic. The official middle exchange rate of the dinar against the euro for August 14 stands at 117.3433 dinars. The indicative rate against the dollar strengthened 0.1 percent, to 101.7104 dinars. The central bank says it will keep pursuing a cautious monetary policy while maintaining relative exchange rate stability, which in practice means decisions are made month by month, based on incoming data.
