Serbia Watch: No surprise in the key rate meeting, +25bp to 5.75%
The Executive Board of the National Bank of Serbia (NBS) continued at an unchanged pace, lifting the benchmark rate by another 25bp to 5.75%.
On the third key-rate-setting meeting this year, as was expected, NBS raised the benchmark rate by 25bp to 5.75%. This denotes the third 25bp hike this year. According to the institution, the decision on the rate hike was made as to avoid local price growth amid the global cost pressure and imported inflation. The stable exchange rate remains an important anchor for the price sentiment. The NBS is aware that decline in energy prices on the global markets and eased global supply chains problems support the global inflation slowdown, yet the faster than expected re-opening of the Chinese economy could support more dynamic global economy growth and add to the increase of energy prices on the global markets.
Following the CPI stabilization in November and December 2022 at 15.1%, inflation accelerated again in January 2023 to 15.8% supported by the seasonal growth in vegetable prices pushing the food and non-alcoholic beverages prices by 23.7%, housing, water, electricity, gas and other fuels (+23.0% yoy) due to the hike in electric energy and gas prices agreed under the IMF SBA deal. According to the NBS, inflation will peak in Q1, despite the fact that there will be another gas and electric energy price hike in May. We assume that an average agricultural season (after two consecutive years of drought) and reduced local demand (both personal consumption and investment demand) together with lower external demand, will have more anti-inflationary impact vs. the increase in production costs. The NBS expects a more pronounced slowdown dynamics in H2 2023 and inflation ending at 8%, whereas we still maintain 8.5% (eop) projection.
Given still elevated inflation we expect another 25bp hike in April’s monetary policy meeting — to 6%. Yet, given that the ECB has not ended their hiking agenda yet (due to core inflation stickiness) and that the interest rate differential is also important given the rejuvenated foreign investors’ appetite for the local debt market, we could imagine the local key rate going slightly beyond 6%. For the time being we keep 6% forecast, but will assess whether the circumstances warrant a new scenario.
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Ljiljana GRUBIC
Serbia Ljiljana joined Raiffeisen in 2001 as specialist for banking credit risk analyses, later enlarging its focus to municipalities and insurance credit risk analyses. In 2007 she moved to research team, becoming equity research analysts and afterwards in 2010 expanding its analytical skills to macro-economic analyses, becoming Economic Research Specialist. Thus, her main focus is on the Serbian macroeconomy. She is a speaker at corporate/investors conferences and roadshows organized within the Raiffeisen bank. In her spare time, she enjoys hiking and dancing.
The Executive Board of the National Bank of Serbia (NBS) continued at an unchanged pace, lifting the benchmark rate by another 25bp to 5.75%. |
As the negative terms-of-trade shock is fading on forward-looking foreign exchange markets, it's back to the usual suspects: inflation, central banks and interest rates. Recent weeks have been characterized by an inflation re-awakening, which triggered a substantial hawkish re-pricing of global central banks. In spite of interest rates moving more or less in tandem on both sides of the Atlantic, the market environment was US dollar positive. In Central Europe this, however, did not prove to be a substantial headwind until now as exchange rates stabilized around rather strong levels. We are cautious that current valuations can endure over the medium-term not least due to narrowing interest rate differentials between the ECB and CE-3 central banks. In Eastern Europe the strong depreciation of the Russian and Belarusian rouble over recent months might have come to a halt and limits the depreciation potential for the rest of the year. In Ukraine, the hryvnia became more balanced and we upgraded our forecasts in response. Also in Serbia the commitment to a stable exchange rate remains strong. This issues features:
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The Serbian economy escaped the recession in Q4 2022, with GDP growing by 0.7% qoq after falling by 0.7% qoq in Q3 2022. In annual terms, the economy lost its dynamics (+0.4% yoy) amid weak performance of agriculture and construction. |
The monthly dynamics in retail prices revived again in January (+1.4% mom, after December’s 0.5% mom) supported by the seasonal growth in the food prices and hike in the electric energy and gas prices. The annualized print jumped to 15.8% yoy after 15.1% in December 2022. |
After slowing the pace of interest rate hikes in January (+25bp), the Executive Board of the National Bank of Serbia (NBS) continued with this stance in February, lifting the benchmark rate by another 25bp to 5.50%. |