Thursday, December 10, 2020

Serbia cuts rate 1st time in 6 months to soften virus hit

     Serbia's central bank cut its key interest rate for the first time in six months to ease the potential negative impact on its exports from the rise in COVID-19 cases worldwide, and particularly Europe.
     The National Bank of Serbia (NBS) cut its policy rate by another 25 basis points to 1.0 percent and has now cut it four times this year by a total of 125 points.
     NBS has been in a monetary easing cycle since November 2013 and has cut its rate 28 times since then by a total of 10.25 percentage points.
      The rate cut took most economists by surprise but at its last meeting in November, the bank's executive board not only offered banks additional cheap liquidity in what it said was a proactive and preemptive measure, it also said low inflation showed there was room for additional monetary easing and it was ready to respond to any excessive negative effects from the pandemic.
     "Although the global economic recovery as of May was faster than expected, the accelerated spread of the virus as of October is worrying, particularly in Europe," NBS said, cautioning the challenges from the pandemic and its impact on the global and domestic economy will persist, particularly this winter.
     The spread of the virus would slow the recovery of the euro area - Serbia's most important trading partner - in the short run and drag down demand for its exports.
     "Today's decision of the Executive Board aims to mitigate a potential spill-over of the negative economic impact of these trends in the euro area," the bank said, adding the rate cut would provide additional support to the domestic economy.
     In addition to the rate cut, the board also narrowed its main interest rate corridor by 10 basis points to plus/minus 1 percentage points around the policy rate, which lowers the deposit rate by 15 basis points to 0.1 percent and the lending rate by 35 points to 1.9 percent.
      The board also approved keeping its inflation target of 3.0 percent, plus/minus 1.5 percentage points, until 2023.
     Serbia's economy bounced back faster than expected in the third quarter from the hit to its economy in the second quarter, supported by its own and the government's stimulus - and NBS confirmed it expects gross domestic product to shrink by 1.0 percent this year as compared to earlier forecasts of a 1.5 percent contraction despite a worsening of the pandemic since October.
     Serbia's GDP shrank an annual 1.4 percent in the third quarter after a 6.3 percent fall in the second quarter and growth of 5.2 percent in the first quarter.
     "A better outcome is supported particularly the faster than expected recovery of investment, mainly due to the preserved production capacities and employment in the pandemic conditions, the accelerated implementation of infrastructure projects and the secured more favorable financing conditions," NBS said.
     Government spending and easier financing conditions is expected to boost domestic demand and along with a further normalization of external demand, NBS expects growth in 2021 of around 6 percent.
     Serbia's inflation rate has remained stable in recent months - it was 1.8 percent in October and September - and NBS expects inflation to remain close to the lower part of its target range before rising toward the midpoint of 3.0 percent during 2022, reflecting a recovery of demand.
     


     The National Bank of Serbia issued the following statement:

"At its meeting today, the NBS Executive Board decided to ease monetary policy further and trim the key policy rate by 25 basis points, to 1%.

By making such decision, the Executive Board is providing additional support to the domestic economy, having in mind the scale of the pandemic-induced crisis worldwide, renewed worsening of the epidemiological situation and economic slowdown globally, and especially in Europe. This additional support is possible owing to the responsible conduct of economic policy in the prior period, which ensured the capacity of monetary policy and public finance to fight the current crisis without jeopardising the achieved low and stable inflation and other indicators of macroeconomic stability.

After this cut, the key policy rate is by 1.25 percentage points lower than before the pandemic. The Executive Board expects that further monetary policy easing, coupled with the past robust response of the NBS and the Government, as well as the announced additional fiscal policy measures, will continue to exert a positive effect on the financing conditions for corporates and households and contribute to the rise in their disposable income. 

At the same time, the NBS decided to narrow the main interest rate corridor, from ±1.0 percentage point to ±0.9 percentage points relative to the key policy rate, whereby the deposit facility rate was reduced by 15 basis points, to 0.1%, and the lending facilities rate by 35 basis points, to 1.9%.

A softer than initially anticipated economic decline in Q2 and better recovery thereafter are largely attributable to the adequate support provided to the economy by the NBS and the Government. Having this in mind, the NBS expects an even more favourable GDP growth rate this year than anticipated at the start of the pandemic, -1.0% instead of -1.5%, even though the epidemiological situation at home and abroad has deteriorated since October. A better outcome is supported particularly by the faster than expected recovery of investment, mainly due to the preserved production capacities and employment in the pandemic conditions, the accelerated implementation of infrastructure projects and the secured more favourable financing conditions. Labour market data on the rising employment rate and the maintained single-digit unemployment rate attest to the significance of the package of economic measures, which helped sustain favourable trends despite the challenges imposed by the pandemic. The country’s maintained positive medium-term outlook and the measures of the Government and the NBS are expected to support the recovery of domestic demand, which will, along with the further normalisation of external demand, lead to a more than full recovery of our economy next year and a GDP growth rate of around 6%.

The Executive Board underlines that inflation in Serbia has stayed firmly under control, as in the past seven years. An important pillar of low and stable inflation is the relative stability of the exchange rate, as well as anchored inflation expectations of the financial and corporate sectors, which illustrate the credibility of monetary policy. Consistent with NBS expectations, October inflation stayed unchanged from a month earlier, measuring 1.8% y-o-y. Despite a continued rise in wages and employment in the majority of sectors, demand-side pressures remain relatively low, as evidenced by low and stable core inflation. According to the NBS’s projection, inflation will continue to move in the lower part of the target tolerance band, closer to its lower bound, and will start its gradual approach to the target midpoint (3%) during 2022, reflecting the expected further recovery in demand.

Although global economic recovery as of May was faster than expected, the accelerated spread of the virus as of October is worrying, particularly in Europe. In the short run this could slow the recovery of the euro area, our most important trade and financial partner, and drag down external demand for our exports. Today’s decision of the Executive Board aims to mitigate a potential spill-over of the negative economic impact of these trends in the euro area. Still, the vaccine-related news is encouraging, though it is still not known with certainty when it will be available and how fast it will be rolled out. Due to the relatively slow global recovery, the Board expects no significant inflationary pressures from inflation abroad, but mandates caution over potentially higher volatility of primary commodity and food prices amid pandemic-related uncertainties. Still, the Board highlights our economy’s strong resilience to external shocks, ensured through responsible running of economic policy in the earlier years and an adequate response to the current global crisis. Moreover, Serbia has recently achieved the lowest price of euro financing in the international financial market – 1.066% over a ten-year term.

The challenges as to the course of the pandemic and its impact on economic developments globally and at home will persist in the coming period, particularly winter. Economic policy makers will therefore strive to support further recovery of our economy, preserve production capacities and employment, and encourage further growth in exports and domestic and foreign direct investment. The NBS will continue to keep a close eye on all developments and the impact of key factors from the domestic and international environment on inflation, financial stability and the pace of economic recovery. It will continuously assess the impact of all past measures so as to support further economic recovery, without prejudice to price and financial stability. The NBS will continue to provide banks with cheap dinar liquidity via additional swap FX and repo securities purchase auctions, thus encouraging further growth in credit and, by extension, economic activity.

The Executive Board adopted today the Memorandum on Inflation Targets until 2023, keeping the inflation target at 3.0±1.5% until the end of 2023.

The next rate-setting meeting will be held on 14 January 2021."

    www.CentralBankNews.info

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