The Governing Council also decided to increase the envelope of PEPP by EUR 500bn to a total of EUR 1,850bn. It also extended the horizon for net purchases under the PEPP to at least the end of March 2022.

The Governing Council of the ECB held a monetary policy meeting in Frankfurt yesterday and below you can find the decisions brought by the Council. The mentioned decisions were in line with the markets expectations.  In view of the economic fallout from the resurgence of the pandemic, the Governing Council recalibrated its monetary policy instruments as follows:

• The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50%. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

• The Council decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by EUR 500bn to a total of EUR 1,850bn. It also extended the horizon for net purchases under the PEPP to at least the end of March 2022. In any case, the Governing Council will conduct net purchases until it judges that the coronavirus crisis phase is over. The Governing Council also decided to extend the reinvestment of principal payments from maturing securities purchased under the PEPP until at least the end of 2023. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

• The Council decided to further recalibrate the conditions of the third series of targeted longer-term refinancing operations (TLTRO III). Specifically, it decided to extend the period over which considerably more favourable terms will apply by twelve months, to June 2022. Three additional operations will also be conducted between June and December 2021. Moreover, the Governing Council decided to raise the total amount that counterparties will be entitled to borrow in TLTRO III operations from 50% to 55% of their stock of eligible loans. In order to provide an incentive for banks to sustain the current level of bank lending, the recalibrated TLTRO III borrowing conditions will be made available only to banks that achieve a new lending performance target.

• The Council decided to extend to June 2022 the duration of the set of collateral easing measures adopted by the Governing Council on 7 and 22 April 2020. The extension of these measures will continue to ensure that banks can make full use of the Eurosystem’s liquidity operations, most notably the recalibrated TLTROs. The Governing Council will reassess the collateral easing measures before June 2022, ensuring that Eurosystem counterparties’ participation in TLTRO III operations is not adversely affected.

• The Council also decided to offer four additional pandemic emergency longer-term refinancing operations (PELTROs) in 2021, which will continue to provide an effective liquidity backstop.

• Net purchases under the asset purchase programme (APP) will continue at a monthly pace of EUR 20bn. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates. The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

• The Eurosystem repo facility for central banks (EUREP) and all temporary swap and repo lines with non-euro area central banks will be extended until March 2022.

The key rate was cut by 25bps, which is now 1.25 p.p. lower than before the pandemic.

At its yesterday’s meeting, the NBS Executive Board decided to ease monetary policy further and cut once again the key policy rate by 25bps, to 1%. The National Bank of Serbia noted that 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, renewed worsening of the epidemiological situation and economic slowdown globally, and especially in Europe.

After this cut, the key policy rate is by 1.25 p.p. 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 p.p. to ±0.9 p.p. relative to the key policy rate, whereby the deposit facility rate was reduced by 15 bps, to 0.1%, and the lending facilities rate by 35 bps, to 1.9%.

The NBS now expects a GDP decrease of -1% compared to -1.5% initially estimated at the start of the pandemic. 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.

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