NATIONAL BANK OF SERBIA
Introductory speech
InflationReport - May 2022
Dr Jorgovanka Tabaković, Governor
Belgrade, 18 May 2022
Ladies and gentlemen, esteemed members of the press, dear colleagues,
Welcome to the presentation of the May Inflation Report.
The period since our previous, February Report has been marked by developments of immense
bearing on the overall world economy. We are faced with escalating geopolitical tensions, conflict in
Ukraine, and sanctions that hamper economic flows, which has caused major disruptions in the
international commodity and financial markets. Together with the effects of stepped-up
counterpandemic measures in China, this has amplified fears that shortages and halts in global supply chains,
which were expected to resolve gradually during the year, may extend or even become more
pronounced. Russia and Ukraine are important global producers of cereals, metals and minerals, and
Russia of oil and natural gas as well, therefore the conflict caused these product prices to continue
up and come close to or even go beyond their historically highest levels. Amid such circumstances,
all relevant international financial institutions downgraded the economic growth prospects for this
year and significantly increased the inflation projection at the global level.
Chart 1 Share of Russia and Ukraine in total global exports of Chart 2 Change in prices of agricultural commodities and
primary commodities in 2020 industrial metals since the start of 2022
(in %) (in %)
Nickel
Wheat
Aluminium
Palladium
Silver
Iron
Raw nickel
Palladium
Platinum
Copper
Cacao
Corn
Cotton
Crude oil
Sugar
Coffee
Refined petroleum
Soy
Aluminium
Russia Ukraine
Wheat
Petroleum Corn
-10 -5 0 5 10 15 20 25 30 35 40 45
0 5 10 15 20 25 30
Change until 21 February Change until end-March
Source: The Observatory of Economic Complexity (OEC).
Source: Refinitiv.
The impact of the conflict on the global prices of energy, food and raw materials is important, and
together with sanctions, acts as a drag on global economic growth, notably the economic growth of
the euro area - our biggest foreign trade partner. With this in mind, relative to the expectations from
February, the NBS adjusted its main macroeconomic projections - inflation and current account
deficit have been revised up, and GDP down.
Continuing, we will elaborate in more detail on our new macroeconomic projections, as well as
monetary policy decisions made in the period since the previous Report.
***
As geopolitical tensions escalated, global inflation, which had accelerated over the past year under
the influence of various factors associated with exiting the pandemic, gained new wind in the back,
and in many countries reached levels unprecedented in recent decades. Thus, euro area inflation
rose to 7.5% in April, which is its record since the bloc's establishment in 1999, and in a number of
Central and Southeast European countries it reached two-digit levels. Considering that in the
majority of countries inflation continues to rise beyond expectations, inflation projections for the
coming period are also being substantially revised up and, accordingly, central banks in these
countries are carrying on with monetary policy tightening.
Under the impact of international movements, inflation in Serbia also remained on the upward path
and stood at 9.6% y-o-y in April. A fresh hike in the global prices of energy, food and raw materials
Chart 3 Inflation and target in selected countries in April Chart 4 Policy rates across selected countries
(p.a., in %)
2022
(p.a., in %)
22 77 8
Inflation
USA Euro area
20 70
Target
UK Czech Republic
7
18 Target tolerance band 63
Poland Hungary
16 56
Romania
6
49
14
12 42
5
35
28
4
21
14
3
1086420 70
2
area and
States (RHS) 1
Serbia
Poland Ukraine Russia
Albania
Hungary
Republic
Euro Romania
Montenegro Bosnia
0
Herzegovina
United
Turkey
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Czech
Sources: Eurostat and central banks of selected countries.
* March 2022. Sources: Central banks of selected countries.
pushed up import prices and stepped up cost-push pressures on domestic producer prices. Against
such backdrop, we also witnessed growth of core inflation (CPI excluding the prices of food, energy,
alcohol and cigarettes), which is the most affected by monetary policy measures. Nonetheless, we
maintained the relative stability of the exchange rate, which together with medium-term inflation
expectations of the financial and corporate sectors that have been anchored within the target
tolerance band acted as a strong brake that kept core inflation lower than headline. In addition,
according to our estimates, domestic demand and labour market conditions still do not generate
stronger inflationary pressures. Core inflation in Serbia is lower than in the majority of countries in
the region pursuing the same monetary policy regime, which is the reason why our tightening of
monetary conditions in the prior period was more moderate than theirs.
Chart 5 CPI movements in selected CESEE countries
(y-o-y rates, in %)
15
13.8
14.2
14
13 12.8
12.4
12
11 10.3
9.6
8.3
7.7
5.5
Poland
Romania Hungary Czech Republic Serbia
109876543210
1 3 5 7 9 11 1 3 1 3 5 7 9 11 1 3 1 3 5 7 9 11 1 3 1 3 5 7 9 11 1 3 1 3 5 7 9 11 1 3
2021 2022 2021 2022 2021 2022 2021 2022 2021 2022
Inflation Core inflation Inflation target Target tolerance band
Source: Central banks of selected countries.
According to our new central projection, we expect y-o-y inflation to strike a downward trajectory in
the second half of the year, though from a higher level than anticipated in February. It will most
likely return within the target tolerance band in the second half of 2023, and then continue to slow
down until the end of the projection horizon. Rising global prices of primary commodities, energy,
as well as higher imported inflation, will continue to exert inflationary pressures for several more
months. However, these pressures are expected to subside over the projection horizon, as indicated
by projections of relevant international institutions, as well as market expectations. Also, the arrival
of the new agricultural season should topple fruit and vegetable prices from their currently high
levels and, through lower costs, result in slower processed food price growth. The effects of past
tightening of monetary conditions will also work towards mitigating inflationary pressures, as will the
effects of the Government's economic measures on food and energy prices in the domestic market in
the short run.
Our decision on further tightening of monetary conditions was based on stepped-up cost-push
pressures in the international and domestic environment, which intensified additionally with the
outbreak of the conflict in Ukraine, as well as the need to influence inflation expectations of market
players and limit the second-round effects on the prices of other products and services. Before the
April meeting of the Executive Board, we responded by raising the weighted average interest rate in
repo auctions where we engage in weekly withdrawal of excess dinar liquidity from the banking
system. When this rate became almost equal to the key policy rate, we raised the key policy rate by
50 bp in April, for the first time in nine years. In May, we raised the rate again by another 50 bp to
its present level of 2.0%.
Chart 6 Inflation projection
Chart 7 Movement in the key policy rate and average repo
(y-o-y rates, in %)
rate
(daily data, p.a., in %)
12
4.0
11
Key policy rate
3.5
Lending facilities rate
10
Deposit facilities rate
9
3.0 Average repo rate
8
2.5
7
6
2.0
5
4
1.5
3
1.0
2
1
0.5
0
-1
0.0
3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3
1/ '20 4/ '20 7/ '20 10/ '20 1/ '21 4/ '21 7/ '21 10/ '21 1/ '22 4/ '22
2020 2021 2022 2023
Source: NBS. Source: NBS.
When making these decisions, we made sure that our monetary policy is consistent with delivering
price stability in the medium term, as well as that financing conditions remain relatively favourable
from the point of view of ensuring continued stable growth in lending and overall economic activity.
Lending accelerated relative to end-2021 and was 12.1% higher in March than a year ago, while its
composition by sector and purpose confirms that it remains an important source of production,
investment and consumption financing. Lending growth is also propped by the preserved financial
soundness of banks, as well as the quality of their assets. This is attested by the share of NPLs in
total loans which contracted further, to 3.4% in March, this being almost its lowest level on record,
as well as the capital adequacy ratio of around 20%, significantly beyond the regulatory minimum.
Chart 9 NPL share in total loans, gross principle
Chart 8 Lending activity to the non-monetary sector
(in RSD bn) (in %)
(y-o-y growth rates in %, excluding the exchange rate effect)
20
500 25
15
400 20
10
300 15
5
200 10
0
100 5
-5
Enterprises
Households
-10
0 0
Total
2010 2012 2014 2016 2018 2020 March
2022
-15 Household sector
Corporate sector
2010 2012 2014 2016 2018 2020
Other sectors
Source: NBS.
Source: NBS. NPL share in total loans (RHS)
The effects of the Ukraine conflict, which have slowly begun to spill over to economic activity in the
euro area, have so far not produced any major effects on economic activity in Serbia. According to
the preliminary SORS estimate, y-o-y GDP growth remained relatively dynamic in Q1 this year,
measuring 4.3%. Growth was led primarily by increased activity in the service sectors and industry on
the production side, and by consumption and investment, including inventories, on the expenditure
side. Conversely, net exports provided a higher than anticipated negative contribution amid elevated
import of energy but also of equipment and intermediate goods for investment project
implementation, though manufacturing and mining output and, by extension, export continue to
record high growth rates.
In view of the negative effects produced so far by the Ukraine conflict, primarily its impact on global
prices of energy and other raw materials, and the resulting global outlook revisions by leading
international institutions, the NBS has revised Serbia's GDP projection. Under our new projection,
GDP growth this year will range from 3.5 to 4.5%, down by 0.5 pp from what we expected in
February. This was done by other relevant international institutions as well, such as the International
Monetary Fund, European Bank for Reconstruction and Development (EBRD) and Consensus
Forecasts, though it is important to note that Serbia's economic growth outlook was revised down
almost the least among the countries of the region. The key factors behind the downward revision
of real GDP growth include international developments - the negative effects of the conflict and
estimates of lower economic growth in the euro area and countries of the region.
Chart 11 Changes in economic growth estimates in 2022
Chart 10 Contributions to real GDP growth, expenditure side
and 2023 by country in January-April
(in pp)
7.4
8
0.5
6
4.5 4.5 4.5
4.3 0.0
4.0
3.3
4
2.9
2.0 2.1 -0.5
1.8
2
-1.0
0
-1.5
-0.7
-2
-0.9
-1.6
2022 2023
Change in inventories
-2.0
Net exports
-4
Government consumption
Gross fixed capital formation
-2.5
-6
Household consumption
GDP (in %)
and
-8 Serbia
Croatia Poland
Czech Albania
Bulgaria North
Slovakia Hungary Slovenia
Republic Romania
2011 2013 2015 2017 2019 2021 2023*
Macedonia
Bosnia
Montenegro
Sources: SORS and NBS. Herzegovina
Source: Consensus Forecasts.
* NBS estimate.
Assuming that geopolitical tensions would not heighten further and that the global gas supply would
not be discontinued, we have kept our medium-term GDP growth projection of 4-5% per annum
unchanged, with a further increase in employment. A favourable medium-term outlook is sustained
by Serbia's preserved macroeconomic and financial stability, as well as investment and consumer
confidence, but also by increased production capacities, primarily in the tradable sectors, and the
anticipated implementation of planned strategic infrastructure projects. As a result, the share of
fixed investment in GDP should exceed the desirable level of 25% next year and continue up.
Elevated energy import, resulting mostly from higher import prices, led to a widening of the current
account deficit and added to depreciation pressures in the domestic FX market since the start of the
year. For this reason, we have also revised our current account deficit projection for this year from
below 5%, which is what we expected in February, to 6.5% of GDP. It is, however, important to
note that this continues to be a deficit which, both in our and in the IMF's estimate, ensures
external sustainability. Over the coming years, the current account deficit is expected to contract
gradually towards 5% of GDP (assuming a normalisation of energy prices) and to be covered by net
FDI inflows to a substantial degree.
Chart 12 Current account and FDI projection
Chart 13 Dinar exchange rate and NBS transactions in the FX
(in % of GDP)
market
(EUR/RSD)** (in EUR mn)
15
140 1,000
135
800
10 130
600
125
120 400
5
115
200
110
0
0
105
100
-200
-5
95
-400
90
-10
-600
85
80
-800
-15
75
NBS transactions in the FX market, monthly (RHS)*
-1,000
70
EUR/RSD, monthly average (LHS)**
-20
65 -1,200
2019 2020 2021 2022* 2023* 2024* 2010 2012 2014 2016 2018 2020 2022
Secondary income Primary income Source: NBS.
Source: NBS. Services Goods * + net purchase; - net sale.
* NBS projection. Current account FDI ** EUR 1 in RSD.
Depreciation pressures also stemmed from increased risk aversion amid uncertainty prevailing in the
international financial market and households' elevated demand for cash in the initial weeks of the
conflict. FDI inflow worked in the opposite direction, measuring EUR 745 mn in the four months of
the year and remaining diversified by project and geographical region.
The NBS alleviated depreciation pressures by intervening in the FX market, thereby providing
additional FX liquidity to banks, and, in April, also by raising the key policy rate. As a result, the dinar
remained almost unchanged against the euro. By preserving exchange rate stability, we prevented
the spillover of rising import prices of food and energy to other prices from being compounded by
the effects of dinar depreciation, which was the case in previous episodes of robust growth in these
prices. By doing this, we also prevented a fall in consumer and investment confidence. At the same
time, I wish to reiterate that, thanks to a responsible conduct of economic policy and the proactive
measures taken over the past years, we increased our FX reserves in order to be able to use them for
responding to crises such as these which we have been facing in the past two years. Despite hefty
interventions in March, Serbia's FX reserves remained adequate at EUR 14.1 bn at end-April, covering
five months' worth of the import of goods and services, which is almost twice the level prescribed by
the adequacy standard.
Ladies and gentlemen, esteemed colleagues
Until recently, hardly anyone could have imagined that the world would face the consequences of
the coronavirus pandemic, the energy crisis and such heightened geopolitical tensions at almost the
same time. At present, there are many great unknowns - the duration of the Ukraine conflict and its
possible long-term consequences for global trade, as well as the prices and availability of energy,
industrial raw materials and food. Uncertainty also refers to the complexity of the functioning of
global markets in the conditions of geopolitical tensions and global value chain disruptions, speed of
normalisation of monetary policies of leading central banks and the effects on global financial
conditions, etc. For the time being, we judge the risks to the projection of global and domestic
growth to be tilted to the downside, and those to inflation - to the upside.
As the economic policy makers, we are faced with multiple challenges. You may, however, rest
assured that the Government and the NBS will pursue a consistent and responsible economic policy
and do everything to make sure our economy is strengthened further, just as we did after the
pandemic broke out. In this way, we will increase our economy's resilience further and stand ready
to respond to all challenges coming from the international environment.
Going forward, we will continue to carefully monitor and evaluate factors from the domestic and
international environment, which will determine our future decisions and steps. Depending on
geopolitical developments and the movement in key inflation factors from the domestic and
international environment, the NBS will estimate whether there is a need to tighten monetary
conditions further or whether the effects of past tightening ensure a sustainable return of inflation
within the target tolerance band over the projection horizon. Delivering price and financial stability in
the medium term remains the NBS's monetary policy priority, while supporting further economic
growth and development, a further rise in employment and a favourable investment environment.
I now give the floor to my colleagues from the Economic Research and Statistics Department to
present our latest projections in more detail.