Republic of Serbia BILATERAL SCREENING Chapter 17 Economic and monetary policy EXCHANGE RATE POLICY

Republic of Serbia BILATERAL SCREENING Chapter 17 Economic and monetary policy EXCHANGE RATE POLICY

Chapter 17 Economic and Monetary Policy 1. Legal framework of the EU 2. Legal framework of the Republic of Serbia 3. Secondary legislation foreign exchange market 4. Monetary policy strategy and instruments 5. Foreign exchange operations 6. Supporting slides: monetary and fx developments 2/13

1. LEGAL FRAMEWORK OF THE EU - Treaty on the Functioning of the European Union Article 139 Member States with a derogation Article 140.1 Achievement of a high degree of sustainable (economic) convergence Article 142 Exchange rate policy as a matter of common interest - Protocol (No 13) on the Convergence criteria 3/13

2. LEGAL FRAMEWORK OF THE REPUBLIC OF SERBIA (1/2) The Law on the National bank of Serbia Article 4.1. 1) The NBS determines and implements monetary and foreign exchange policies Article 14 The NBS Executive Board defines monetary and foreign exchange policies, including dinar exchange rate policy Article 43.1 The NBS autonomously pursues the dinar exchange rate policy Article 43.2 The NBS determines the dinar exchange rate regime with the consent of the Government (the Council of the Governor upon the proposal of the Executive Board Article 23.1.2) Article 44. The NBS shall purchase and sell foreign exchange and foreign currency cash in the foreign exchange market, for the purposes of implementing its monetary policy; maintaining its foreign exchange reserves at an adequate level; maintaining external payments liquidity. - Decision on the Dinar Exchange Rate Regime ("Official Gazette of RS", No. 95/2010) managed floating exchange rate regime 4/13

2. LEGAL FRAMEWORK OF THE REPUBLIC OF SERBIA (2/2) The Law on Foreign Exchange Operations Article 40 Setting of exchange rates supply and demand in the market Article 41 Setting of the official middle exchange rate (applied for bookkeeping and statistical purposes, calculation of customs, etc) the NBS, on each business day, sets and publishes the official middle exchange rate of the dinar against the euro, as well as against other currencies Article 38 Foreign Exchange Market Foreign exchange and foreign cash may be purchased and sold only for the purposes permitted by the Law. The NBS prescribes terms and operating procedure in the foreign exchange market. 5/13

3. SECONDARY LEGISLATION - FOREIGN EXCHANGE MARKET - Decision on Operating Terms and Procedures in the Foreign Exchange Market ("Official Gazette of RS", Nos. 10/2011, 109/2012 and 55/2014) - Decision on Terms and Conditions of Foreign Exchange Spot Trading between the National bank of Serbia and Banks ("Official Gazette of RS", Nos. 10/2011 and 18/2012) - Decision on Terms and Conditions of Foreign Exchange Swap Trading between the National bank of Serbia and Banks ("Official Gazette of RS", Nos. 10/2011 and 18/2012) - Decision on Types of Foreign Exchange and Foreign Cash to be Purchased and Sold in the Foreign Exchange Market ("Official Gazette of RS", Nos. 98/2012 and 143/2014) 6/13

4. MONETARY POLICY STRATEGY AND MAIN INSTRUMENT (1/2) - Agreement between the NBS and the Government on Inflation Targeting as a Monetary Strategy, December 2008 - Memorandum on Inflation Targeting as a Monetary Strategy, Dec. 2008 - National Bank of Serbia s Memorandum on Inflation Targets (every two years) - Monetary Policy Programme of the NBS, annualy - Dinarisation strategy mutually implemented by the NBS and the Government. Primary objective price stability Inflation target annual percentage change in CPI (4% with ±1.5 p.p. until end- 2016) Key policy rate the main monetary policy instrument, applied in main monetary policy operations (currently, one-week reverse repo transactions) Interest rate corridor key policy rate ±2.5 p.p, the lowest: rate on deposit facility; the highest: rate on lending facility 7/13

4. MONETARY POLICY OTHER INSTRUMENTS (2/2) Open Market Operations (repo and outright transactions) Required Reserves Lending and Deposit Facilities (Standing Facilities) Operations in the foreign exchange market 8/13

5. FOREIGN EXCHANGE OPERATIONS - FX Spot Interventions in domestic interbank market Consistent with price stability objective, without numerical targets, in order to: mitigate excessive short-term volatility of the exchange rate preserve price and financial stability maintain the adequate level of foreign exchange reserves - FX Swaps Supporting role, 2W and 3M regular EUR/RSD and RSD/EUR auctions 9/13

6. Supporting slides Inflation developments Inflation projection (y-o-y rates, in %) 16 14 12 10 8 6 4 Contributions of CPI Components to y-o-y Inflation (y-o-y rates, in %) 18 14 10 6 Unprosessed food Processed food Industrial products excl. food and energy Services Energy 2 0 2 1.7-2 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 2009 2010 2011 2012 2013 2014 2015-2 1 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 9111 3 5 7 911 2009 2010 2011 2012 2013 2014 IT central CPI projection: 4%with ±1,5% from 2013 until 2016 End of 2014 y-y CPI: 1,7% Volatility of food prices (food prices make 35% of CPI) Low aggregate demand expected to remain strongest disinflationary factor in medium term Volatility of CPI 10/13

6. Supporting slides Interest rates developments Key NBS policy rates and interest rates on the money market (daily data, p.a., in %) 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 1 2009 BEONIA Key policy rate Interest rate BELIBOR 1W Interest rate on deposit facility Interest rate on lending facility Average weighted interest rate for repo sold securities 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 2010 2011 2012 2013 2014 Interest rates on new loans and deposits to private sector (weighted average values, p.a., in %) 28 26 24 22 20 18 16 14 12 10 8 New dinar household loans New dinar corporate loans New dinar household deposits New dinar corporate deposits Key policy rate, period-average 6 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 2011 2012 2013 2014 * Excluding revolving loans, current account overdrafts and credit card debt. Deposit and lending facilities rates form an interest rate corridor around key policy rate for the shortest money market rates Current cycle of monetary policy easing started in mid 2013, and since then the key policy rate has been lowered by 375 b.p. Bank lending and deposit rates have been following the key policy rate High deposit and loan euroisation in banking sector undermines monetary policy efficiency 11/13

6. Supporting slides Exchange rates developments Exchange Rate Developments (daily data, 1 st January 2009 = 100) 120 115 110 105 100 95 90 85 80 Czech Republic Romania 75 Poland 70 Hungary 65 Turkey Serbia 60 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 2009 2010 2011 2012 2013 2014 2015 Exchange rate movements affected by market factors, both global and domestic Recent global factors: risk sentiment among international investors and geopolitical tensions Domestic factors: currency account disbalance, concentrated fx demand of energy sector, public debt financing, sustainability of economic policy Movements in EUR/RSD exchange rate and NBS FX interventions (EUR mln) 105 90 75 60 45 30 15 0-15 -30-45 -60-75 -90-105 NBS interventions (LHS)* EUR/RSD exchange rate (RHS)** 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 2009 2010 2011 2012 2013 2014 * + sale; - purchase. ** 1 EUR in RSD. NBS interventions on both sides of the market In 2014, the dinar weakened against the euro by 5.2%. 130 120 110 100 90 80 70 60 50 12/13

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