In its meeting yesterday, the NBS Executive Board adopted a new Decision on Required Reserves of Banks, consistent with the National Bank of Serbia’s strategic commitment to use all monetary policy instruments to bring inflation within the target band in the medium term.

The Decision tightens the reserve requirement policy and represents a step further in a bid to tighten overall monetary policy so as to rein in inflation expectations and prevent the pass-through from agricultural shock and food price increases to other prices.

With inflation currently above the target, the adopted changes should prevent the pumping of additional liquidity into the system from February to April this year as envisaged by the earlier decision enacted in March 2010. At the same time, the changes are expected to alleviate the need for upward revisions of the key policy rate in the coming period.

The key changes proposed by the new Decision are reflected in differentiation of reserve requirement ratios on dinar and FX reserve bases depending on the maturity of liabilities, i.e. banks' sources of funding. Another novelty introduced by the Decision is the obligation of banks to allocate in dinars a part of FX required reserves by applying differentiated ratios.

The ratio applied on the portion of dinar reserve base composed of liabilities with maturity up to two years remains the same – 5%, while the ratio of the dinar sources of funding of longer maturity is reduced to zero, meaning that banks will not be required to allocate any required reserves against such liabilities.

The ratio applied on FX liabilities with maturity over two years remains 25%, while the ratio on FX liabilities of shorter maturity is raised to 30%. The Decision further prescribes the obligation for banks to allocate in dinars a part of the euro-denominated FX required reserves, also by applying differentiated ratios – 15% for liabilities with maturity up to two years and 10% for those of longer maturity.

As the above measures will have different implications for different banks, depending on their activities in the prior period, the harmonisation of calculated and allocated required reserves will be gradual – it will take place in three instalments, beginning from the calculation of required reserves on 17 February and ending with the one on 17 April 2011.

The effective FX reserve rate, that used to be above 40%, currently stands at 32.3%. The NBS will continue lowering it when inflation returns within the target band.