National Bank of Serbia (NBS) kept its “promise” from the September key rate-setting session and left the benchmark rate flat at 1%. It also kept the rate on deposit and credit facility unchanged but let the average repo rate on yesterday’s reverse repo auction, grow by 13bp to 0.24%.
The decision was grounded by the institution’s assessment of the transitory nature of currently heightened inflation (Aug: 4.3% yoy). The global factors like energy, food and metal prices surge, supply bottlenecks and local factors i.e. drought causing higher prices of vegetables and cattle food, are putting the inflationary pressure from the supply side. Yet, more importantly, core inflation (headline inflation excluding volatile prices of energy and food) is low and stable throughout 2021 (Aug: 1.8% yoy), as well as the inflationary expectations in the short-term and in the mid-term.
Nonetheless, NBS changed its expectation concerning the inflation level, now expecting the print will fall outside the inflation target (3% +/- 1.5pp). However, with the expiration of this year’s growth in global prices of primary products and cost pressure in the industry and transport, inflation is expected to return to the inflation target in H2 2022, which is also new expectation (earlier was H1 2022).
Further, NBS has already started (as it was announced at its last meeting) taking decisions between the official meetings to preserve the monetary stability: a) decision was made to stop organizing repo purchase auctions of securities from October, through which banks in the previous period were provided with dinar liquidity for a period of three months under very favorable conditions (0.10%) and b) additionally, at the first reverse repo auction in October, the NBS increased the average executive repo rate by 13 bp, from the previous 0.11% (which was the average since the beginning of the year) to 0.24%.
Concerning the fundamentals, NBS is satisfied with the development, expecting GDP growth might exceed 6.5% yoy this year, supported by personal consumption, investments and exports.
We evaluate the ending of the NBS statement as an indication of no rate change this year, as the key goal of the NBS and the government is delivering the fastest growth of GDP and employment. Obviously, with no fresh government stimuli for the economy, low financing costs are important means for achieving this, besides others (i.e. healthy exports demand, investments). Of course, NBS will do everything to ensure price and financial stability and will not jeopardize this goal, this is why it has started using other monetary instruments to alleviate inflationary pressure.
Today’s decision is the first step towards a change in the monetary policy in the direction of more restrictive path, yet the change will be happening gradually complemented with timely NBS announcements (like it was done at the last meeting). What is certain is that NBS further increased, already credible transparency in communication, in this way efficiently dealing with the market’s expectation.
We stick with our no key rate change scenario in 2021, but will reconsider the 2022 scenario (first hike in Q2 2022).
Inflation continues to surprise to the upside with energy prices driving prices up. We revised our inflation for several CEE countries. Central banks are under pressure: After the bold 75bp hike in Czechia, the Romanian National Bank could deliver a 25bp hike next week. The Polish National Bank increasingly looks lonely from a regional perspective in its policy of a “cool hand”, expected to keep the key rate unchanged next week. In the Balkans, tensions between Serbia and Kosovo came into the spotlight, as the EU meets for a Western Balkan Summit. Statements and wordings will be closely watched, as reluctance against an EU enlargement perspective is mounting with Northern European EU states. A no-confidence vote could bring the Romanian government down, possibly followed by a weaker interim administration. The US jobs report is likely to be the key event for global markets on next week's calendar as a “reasonable” result would pave the way for a start of tapering in November.