Serbia Watch: No surprises in the rate-setting meeting

The NBS feels satisfied with the economic sentiment throughout 2021, which is supported by the mix of monetary and fiscal policy measures, prompting the institution to upgrade the GDP projection for this year to 6.5%, up from 6%. The NBS emphasised the upside risks to the projection, given the healthy infrastructural investments, personal consumption and exports sentiment this year. Further, the mid-term GDP projection was upgraded from 4% to the range between 4%-5%, supported by the numerous infrastructural projects in the pipeline.

Though the inflation print is elevated this year (July: 3.3%), amid higher oil and food prices, the NBS expects CPI will move within the set inflation target (+3% +/- 1.5pp) this year, though staying in the upper part of this target band. Concerning next year, the institution expects inflation will slow down the pace in H2 2022, as the inflation triggers from this year will expire in 2022, and the reading will move to the lower part of the CPI target as the year-end approaches. Further, the no rate decision is being supported by the fact that inflation expectations are low and stable (around the central value of the inflation target), which can also be said for the core inflation, where the expectation lies around 2%. For the first time, the NBS announced in its statement it will be ready to take action in the shortest possible time in between the meetings, in case of more pronounced inflationary pressures, i.e. by adequately adjusting dinar liquidity conditions and an appropriate targeting of the average repo rate. The NBS further emphasised it has the opportunity for an adequate and timely response to changes in the market, even without changing the benchmark interest rates, which to a certain extent supports our assumption of no rate changes for this year.

The NBS assesses the global market sentiment positively, yet they monitor the impact of the delta variant spreading in key economies closely. The ECB is obviously not prone to hiking the key rate any time soon, whereas the FED might be starting the bond purchase reduction sooner than later.

We view that the future course of the pandemic remains a downside risk to the economy from autumn onwards, however, the economy will be less exposed to the restrictions (compared with the relatively soft spring restrictions) given the already high level of immunisation and the healthcare system gaining more knowledge and the experience to tackle a new wave. Yet, this risk is bolstering our scenario that the NBS maintains the key rate flat this year, while using FX interventions, repo and FX swap auctions.