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Serbia Watch: Acceleration of disinflation in August to 11.5% yoy
The monthly inflation accelerated in August (+0.4% mom) vs -0.1% mom in July. Annualized print slowed to 11.5% yoy, down from 12.5%, largely due to base effect. While rate hikes seem over alternative tools are used to limit inflation (incl. a new cap on mortgage rates).
Although monthly inflation dynamics accelerated in August (+0.4% mom) after falling by 0.1% mom in July, this is a usual price behaviour in August. Growth has been the result of the less dynamic fall in food and non-alcoholic beverages prices (-0.5% mom) after it dropped by 1.4% mom in July accompanied by growth in transport prices (+2.8% mom) i.e. use and maintenance of cars.
Annualized inflation slowed down considerably to 11.5% yoy after 12.5% yoy in July supported by the high base effect (August/22: +13.2% yoy), but also still weak retail consumption. Food and non-alcoholic beverages price growth slowed to 16.9% yoy (July: +20.4% yoy), housing, water, electricity, gas and other fuels grew by 15.8% (July: 19.6% yoy), furnishings, household equipment and routine household maintenance grew by 15.8% yoy (July: +16.9% yoy). Transport recovered to 0.2% yoy (July: -4.9% yoy). Goods prices went up by 12.6% yoy (July: 13.9% yoy), while services prices grew by 8.3% yoy (July: 8.2% yoy).
NBS kept key rate flat at 6.5% at the meeting held last week, and we expect no rate hike will be made this year, thus we have cut our key rate forecast to 6.5% down from 6.75%. Actually, NBS will use other monetary instruments to keep inflation in check and in this respect NBS increased the mandatory reserve rate on FX and LCY deposits aiming to withdraw LCY liquidity ahead of the implementation of the new government measures worth EUR 550 mn (including pensions and wages hikes, social subsidies). The measure will stabilize the money supply growth and inflation in result. Further, the government agreed to price cuts in key foodstuffs (13 products) via reduction in retail margins supporting further slowdown in food prices, but also supporting citizens in an environment of still high goods prices. Another measure the NBS brought is a temporary limitation (15 months) of the interest rates on mortgage loans to physical persons, the first-time users of these products, with variable interest rates.
The decline in retail trade (August: -3.0 yoy), import prices (August: -4.6% yoy) and even in the agriculture prices (July: -33.5% yoy), together with a stable exchange rate, have certainly added to the inflation pace slowing. There are other disinflationary factors like very conservative fiscal spending and stabilized inflation expectations. Though the risk is still coming from the electricity and gas prices hike in Q423, excises taxes hike in October and the new government stimuli program, we view that the recent measures (MRR hike and key food products prices cut) and on top of that, high base effect will support inflation slowing down to 8.5% (eop) by the end of 2023.
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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. Her long experience in macro-economic analyses and forecasts was lauded by FocusEconomics awards, three years in a row, and her promotion to Chief Economist role. She is a speaker at corporate/investors conferences and roadshows organized within the Raiffeisen bank. In her spare time, she enjoys travelling and painting.
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