The National Bank of Serbia said that low and stable inflation had prevailed for the past seven years, when it averaged about two percent, but that in the second half of this year, with the normalization of global and domestic economic activity due to drought and rising world energy prices in September, rose to 5.7 percent.
“However, the average year-on-year inflation in the period from January to September is three percent,” the NBS stated, regarding the criticism that inflation is high in Serbia.
When it comes to September inflation of 5.7 percent, as stated, almost two thirds of that growth refers to factors that monetary policy cannot influence with its instruments, reference interest rate, exchange rate policy and other instruments.
It is added that 1.8 percentage points refer to the prices of unprocessed food, which increased by 17.9 percent year on year, 0.8 percentage points refer to the prices of processed food, which increased by 3.7 percent, while one percentage point refers to prices of oil derivatives, which increased by 16.3 percent year on year.
According to the NBS, these are factors on the supply side, ie factors that are present in other countries of the world and which are “imported”, ie they are not an exclusive characteristic of the domestic market.
If the NBS reportedly reacted by significantly tightening monetary policy, it would be able to have a slight impact on factors such as food and energy prices, but such measures would do more harm than good to the economy and population, as they would slow economic growth, increase credit prices and endanger the financial stability of the country, including the overall business environment and living standards of the population.
“The NBS is already using the instruments at its disposal, so the assessments about the absence of monetary policy measures in Serbia, which have been made public on several occasions, are completely incorrect. Comparisons in which it is suggested that the NBS should act similarly to central banks in some neighboring countries can only come from the part of the public that either does not follow the work of this institution or deliberately keeps silent about the facts,” the statement reads.
It is pointed out that it is true that some central banks in the region have already tightened monetary conditions, and that the NBS has done so by ceasing to provide cheap dinar liquidity to the banking system, because since October it has completely stopped organizing repo auctions values, through which the banks in the previous period were provided with dinar liquidity for a period of three months under very favorable conditions (0.10 percent).
It is added that the NBS took full advantage of monetary policy flexibility and without changing the reference interest rate (and interest rate corridor) and effectively tightened monetary conditions, increasing the executive repo rate from 0.11 to 0.27 percent, which de facto conducts withdrawal operations.
The differences that exist in terms of tightening monetary conditions in different countries are, as stated, primarily related to the level of core inflation, ie to assess whether and to what extent, the spillover of rising food and energy prices to core inflation.
Core inflation, which in some countries is higher than the total inflation, in Serbia, as it is stated, has been at the level of about two percent since the beginning of the year, which was mostly contributed by the exchange rate stability which was preserved even in the most difficult circumstances of the pandemic.
Having in mind the global factors that continue to act inflationary, the average year-on-year inflation that should be expected in 2021 ranges from 3.5 to four percent.
“We mention average year-on-year inflation due to the fact that this is the most objective measure of inflation, which is used everywhere in the world as a key measure of inflation when calculating other macroeconomic indicators, and also because it is not good to draw conclusions based on inflation for several months,” stated the NBS.
The statement states that when it comes to inflation at the end of the year, ie inflation in December, compared to December of the previous year, according to preliminary projections at this time it is expected to range between six and seven percent, and to return the target limits in the middle of the year and return to the central value of the target of three percent in the second half of next year.
“When it comes to the assessments of the former governor (Dejan Soskic) made public that the NBS implements the monetary policy regime, ‘which is contrary to the official documents that our country has’, we emphasize that the relative stability of the exchange rate and interventions in the interbank foreign exchange market are not contradictions with inflation targeting,” stated the NBS.
She added that more and more works by world economists are “catching up” with the practice shown by certain developing countries “with a prominent level of euroization or dollarization”, that the stability of the local currency exchange rate against the reference currency (euro or dollar) is of great importance or price stability and the financial system.
The NBS stated that the economy and the population of Serbia are not too interested in “what is in the documents”, nor how the results are achieved, but whether the results are achieved or not.
“For years, the exchange rate of the dinar against the euro has been relatively stable, and the economy and citizens, when planning investments and planning consumption, know that it will remain so. That is why we have significantly accelerated economic growth and doubled fixed investments,” the NBS stated.
It is added that despite the pandemic, the average economic growth during the two years of the pandemic will be around three percent, while the share of fixed investments will reach 24 percent of the gross domestic product this year, which is a healthy basis for growth in the coming years, Kamatica reports.
