Although the central bank (NBS) signaled at the last week’s key rate setting meeting, that the inflation print will exceed the upper part of the inflation target (3% +/- 1.5pp) and will stay outside the target until H2 2022, we are surprised with the level reported for September. To some extent, this was a rise driven by base effect (Sept/20: +1.8% yoy), with the very calm monthly development, but other factors played a role. Thus, the main culprit behind this dynamism were again the food and non-alcoholic beverages prices (+8.3% yoy), and among them, vegetable prices (i.e. lower yield due to drought), meat prices (cost of production increased i.e. cattle food, declining cattle number) and edible oil prices (i.e. jump in the sunflower prices on the global markets coupled with the increased demand). Further, recreation and culture prices posted significant growth (+3.2% yoy), with a lower spike in clothing prices (+1.3% yoy) and furniture (+2.5% yoy). Overall, goods prices soared by 6.7% yoy, while service prices increased by 2.4% yoy.
What we see is that food prices will remain the drawback for the inflation at least over the one-year horizon supported by local factors (drought weighing on the vegetable and meat prices) and external factors (continued growth in the food prices on the global markets, reduced supply of certain primary food commodities due to severe weather conditions across the globe reducing the supply, coupled with increased demand after the restrictions were lifted, and transport delays). Also, changing consumption patterns, in terms of seasonality and quantity of purchased goods as a substitute for less consumed services, played a role.
Further, the energy crises currently going on might add some fuel in the coming months, but only in terms of the oil prices growth spillover on the local market. Concerning the gas prices, the government confirmed that the gas price was earlier agreed, thus this winter the country will have sufficient supply and no price pressure.
NBS has already taken steps in terms of shifting the monetary policy course towards more restrictive i.e. stopped providing dinar liquidity to banks via repo purchase auctions of securities and permitted growth in the repo rate at the reverse repo auctions. The market reacted via moderate growth in money market rates and strong growth in yields on the secondary trading of the locally issued MinFin securities. The exchange rate remains well anchored by abundant FDIs flow, FX intervention and historically high FX reserves.
We expect the NBS will remain cautious and hesitant to take the action by hiking the key rate. Obviously, with the third stimuli program being almost utilized and a new wave of Covid potentially having a downbeat impact on the economy in Q4, low financing costs remain (besides exports demand and infrastructural investments) an important instrument for achieving high economic growth. Of course, NBS will act to ensure price and financial stability in the first place and will not jeopardize this goal, this is why it has started using other monetary instruments. Yet, we stick to the opinion that the NBS will be cautious with premature action on the key rate side.