Serbia has increased borrowing costs for the eighth time since the beginning of the year in an effort to tame persistent inflation not seen in decades. The rate was increased by half a percentage point to 4.5 percent, and “the increase aims to limit the secondary effects of price growth through inflationary expectations and thus contributes to the fact that inflation in Serbia is on a downward path.”
The central bank said inflation likely peaked at 14 percent in September, the highest in 11 years. Economists are convinced that inflation will continue to rise, and there is no end to negative inflationary expectations, due to the uncertainty that countries have not seen for a long time.
“Cost pressures and inflation growth continued, primarily due to the rise in import prices. Core inflation (8.6 percent year-on-year in September), which also grew in previous months under the influence of higher import inflation, is still at a significantly lower level than overall inflation ( 14 percent year-on-year in September)”, said the NBS announcement after the decision on the increase.
According to the November medium-term projection, overall inflation will remain elevated until the end of this year and the beginning of next year, the NBS expects, but after that it will be on a downward path, with a significant decline in the second half of 2023 and a return to the target by the end of the projection period.
Serbia’s economy relies a lot on economic flows from the USA and the European Central Bank (ECB), which are also tightening their borrowing conditions, so the Fed’s current reference interest rate is four percent, and the ECB’s is two percent.
As stated by the NBS, the continuation of the tightening of the monetary policy of the leading central banks is expected in the coming period as well, which, along with less favorable prospects for world economic growth, could affect the growth of volatility on the international financial market and the continuation of the already present direction of global capital flows from developing countries to more developed ones. economies.
“Nevertheless, there are prevailing expectations that global inflationary pressures will gradually decrease, which, in addition to the effects of the tightening of monetary policies by central banks, should be contributed to by further reductions in the world prices of primary products and energy sources, primarily oil, as well as the already present relaxation of the stagnation in global chains supply”, expectations are NBS.
Import prices of energy
Serbia is in a bad position as far as the situation with energy sources is concerned, because the energy oil system is owned by the Russian Gazprom, the electricity producer EPS is in big losses and is unable to produce electricity but imports it, and the prices on the free market are at heights that no one he hasn’t seen in decades.
“Sanctioning the supply of Russian crude oil by limiting the price to Europe is risky only in the domain of prices. It is difficult to assess whether Brussels’ expectations are realistic. If we judge by the prompt reaction of the world stock markets, where a new price rise is recorded, the answer is negative. In the following period, prices will be crucially determined by the limited supply of crude oil. The inevitable rise in prices of this energy product will follow in the coming months”, economists from Macroeconomic Analysis and Trends (MAT) are of the opinion. As they stated in the analysis, unlike the price of electricity and the price of natural gas, the price of oil fluctuated moderately this year – even at the end of summer, the price of crude oil expressed in US dollars returned to the level from the beginning of the year.
Serbian President Aleksandar Vučić announced earlier this month that he expects the Serbian economy to slow down to three percent. For its part, the International Monetary Fund (IMF) earlier in October corrected Serbia’s GDP growth to 3.5 percent, while the World Bank (WB) expects GDP growth of 3.2 percent. In the third quarter, this year’s GDP growth slowed down significantly from over four percent to 1.1 percent at the end of September.
As reasons for the slower than expected economic activity, the NBS cites this year’s drought and a significantly worse agricultural season than expected, reduced external demand, as well as continued growth in production costs, which is primarily reflected in lower production in the construction and processing industry. Also, due to the low water level of the rivers, the decline in activity in the energy sector continued.
“The executive board expects that domestic economic activity will slow down in the rest of this year and at the beginning of next year, and that it will accelerate after that, as the effects of the factors that influenced the lower external demand weaken, as well as due to the planned implementation of investment projects, primarily in infrastructure”, stated the NBS in a statement, but so far without an official correction of the expected growth for this year.
The next session of the Executive Board, where the decision on the reference interest rate will be made, will be held on December 8, Bloomberg Adria writes.
