The National Bank of Serbia (NBS) In-between inflation and support for the economy

As per the Law on National Bank of Serbia (“Off. Gazzette of RS”, no. 72/2003, 55/2004, 85/2005 – other law, 44/2010, 76/2012, 106/2012, 14/2015, 40/2015 – decision CC and 44/2018) the Executive Board of the NBS determines the reference interest rate and basic interest rates which the NBS charges banks and pays interest to banks based on money market transactions.

The reference interest rate in the monetary policy implementation process has the role of the signalling interest rate, as well as the role of the starting interest rate, since on the money market the amount of basic interest rates (i.e., the interest rate corridor) is determined by the reference interest rate. The reference interest rate is the highest, i.e., the lowest interest rate applied by the NBS in the procedure of conducting repo transactions of sale (i.e., purchase of securities) and its amount is determined by the Decision on the amount of the reference interest rate of the NBS.

The NBS has increased the reference interest rate three times in the last three months. The last time that occurred was at the Executive Board of the NBS session held on June 9, when the interest rate increased by 50 basis points, and it now amounts to 2.5%. At the same time, the decision was that the NBS interest rate corridor would remain unchanged, meaning that the rate on credit facilities was 3.5%, and the rate on deposit facilities was 1.5%. For better understanding, the interest rate on credit facilities (overnight loan for maintaining daily liquidity) is the highest interest rate, and the interest rate on deposit facilities (overnight deposits deposited with the NBS) is the lowest interest rate of the NBS in transactions.

In conclusion, this was necessary to tighten the domestic monetary conditions in order to limit the secondary effects on inflation expectations and further growth of inflation on the domestic market, to which the NBS, among other measures, contributes by maintaining the relative stability of the dinar (RSD) exchange rate against the euro (EUR).