Misconduct of the Key Policy Rate: The Case of Serbia

During the global economic and financial crisis, namely in the 2008-2009 period, the National Bank of Serbia kept the key policy rate at an unacceptably high level compared to EU member countries. The rationale behind implementation of such monetary policy were attempts to control fluctuations in the dinar exchange rate, keep the current inflation within the planned targets and sterilize capital outflows due to possible repatriation of liquid reserves of foreign commercial banks (the hot money effect). The strictly firmly monetary-oriented policy of the National Bank of Serbia with a significantly high key policy rate as the main pillar only partially fulfilled the above goals. Such policy led to stagnation in the already high commercial banks’ interest rates, which further amplified the downturn in commercial and retail lending, and streamlined the major part of liquid reserves to the National Bank of Serbia through the repo channel. These reasons were the cause of serious recession consequences. The authors assume that the National Bank of Serbia should have started lowering the key policy rate much earlier, at the very beginning of the global economic and financial crisis. The EU member countries and most of the economies that Serbia compares with began significantly decreasing their key policy rates in the first half of 2008.