Introductory speech at the presentation of the
Inflation Report - May 2024
Dr Jorgovanka Tabaković, Governor
Belgrade, 14 May 2024
Ladies and gentlemen, esteemed members of the press, dear colleagues,
As usual, in today's
Welcome to the presentation of the May Inflation Report.
conference we will present key information from the Report, notably current economic
developments, new macroeconomic projections and monetary policy decisions taken
in the period since the previous Report. We will also be glad to take your questions
and provide additional clarifications, if needed.
At the very start of the conference, I would like to underline that in the past year
inflation in Serbia has been on a solid downward trajectory, and over the previous
months it has slowed even faster than we anticipated. In view of such movements,
our current projection expects inflation to enter the bounds of the target tolerance
band already in May, while the previous projection expected this to transpire in mid-
year. At the same time, economic activity in the first quarter of 2024 picked up the
pace beyond our expectations, to 4.6% y-o-y, giving us reasons to believe that we
will achieve the 3.5% GDP growth rate this year, whereas in the previous projection
we forecast growth in the 3-4% range. All of this indicates that our monetary policy
was adequate and that it also ensured price stability in the medium-term, a
continuation of positive economic growth rates and preservation of NPL ratios close
to the historical lowest level of 3%.
We will now give a more detailed presentation of achieved macroeconomic
movements and our latest projections.
***
As noted in the beginning, inflation in Serbia continued to lose breath, even faster
than we projected in February, as well as a year ago. Relative to its peak from March
last year, headline inflation this April was more than three times lower, measuring
5.0%. It slowed further owing to the smaller increase in food prices amid the easing
of global cost-push pressures, which stood below headline inflation as of February
and measured 2.9% y-o-y in April. Core inflation also acted as an important drag on
headline inflation and, thanks to the past monetary policy tightening and the lower
imported inflation in the same period, it edged down by 6.5 pp to 4.8% in April.
Chart 2 Change in contribution of main CPI components to
Chart 1 May 2023 inflation projection and its outcome
(y-o-y rates, in %) y-o-y inflation - relative to March 2023*
(in pp)
18
0
16.2
-1
16
-2
14
13.7
-3
12
-4
10.2
10
-5
8
7.6
-6
6
5.0
-7
4
-8
Unprocessed food
-9
2
Processed food
-10
Energy
0
Industrial products excluding food and energy
-11
-2 Services
-12
3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3
2021 2022 2023 2024 2025 June Sept. Dec. Jan. Feb. Mar.
Source: NBS. Sources: SORS and NBS calculation.
* Y-o-y inflation peaked in March.
Also, in the majority of neighbouring countries, just as in the euro area and the USA,
since the start of the year core inflation has trended at a higher level than headline,
therefore a priority of central banks' monetary policies will be to ensure that core
inflation continues on the downward path. A more detailed overview of core inflation
trends in Serbia and the neighbouring countries is available in one of the text boxes
in our May Report.
Chart 3 Headline and core inflation movements from 2021 to 2024
(y-o-y rates, in %)
Headline inflation Core inflation
28
26
24
22
20
18
16
14
12
10
8
6420
Source: Eurostat.
According to our latest projection, inflation will return within the bounds of the target
tolerance band of 3±1.5% most likely in May, which is somewhat earlier than what we
expected in the February projection. This is also indicated by our nowcasting model
through which we obtain and process around 30,000 prices of products and services
from around 130 internet sites in real time, and within which we develop techniques
that rely on artificial intelligence. So far, this model has been rather reliable in
assessing current inflation, and we will continue to develop it in the coming period.
Chart 4 Inflation projection
Chart 5 Current inflation and one-year ahead inflation
(y-o-y rates, in %)
expectations
(y-o-y rates, in %)
18
18
Current inflation (y
16
16
Financial sector*
Corporate sector*
14
14
Financial sector - Bloomberg
12
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3
2022 2023 2024 2025 2026 Sources: Gallup, Ipsos/Ninamedia, Bloomberg and NBS.
* Ipsos and Gallup until December 2014, Ninamedia since December 2014, and Ipsos
Source: NBS.
since January 2018.
In the remainder of the year, we expect inflation to slow further and move around the
3% target midpoint as of next year and over the projection horizon. Such inflation
movements will be under the biggest impact of the effects of past monetary tightening
and receding inflation expectations, as well as the loosening global cost-push
pressures, the continued slowdown in imported inflation and the still subdued
external demand.
Short-term inflation expectations of the financial and corporate sectors decreased
significantly in the past year, and financial sector's expectations returned within the
target bounds at the start of the year. According to the results of Bloomberg's April
survey, they are almost on the target midpoint and measure 3.1%. Such movements
are helping push inflationary pressures further down, and at the same time speak in
favour of enhanced credibility of our monetary policy.
The downward inflation trajectory and the expected movements of its key factors in
the domestic and international environment are pressing the question of when we
should start with monetary accommodation, to what extent and at what pace. Our
stance was to adhere to the principle of cautiousness so as not to rush into
premature monetary policy relaxation. Our decision to keep our key policy rate
- -
unchanged at 6.5% was dictated by the still elevated though receding global
inflationary pressures and the persistent and significant uncertainty in terms of
movements in global energy and other primary commodities prices.
Chart 6 Changes in money market interest rates from Chart 7 Interest rate movements
(monthly average, in %)
October 2021 to July 2023
(in bp)
Key policy rate
700
26 Interest rates on new dinar household loans
Increase from April 2022 to July 2023
Interest rates on new dinar corporate loans
24
Increase from October 2021 to April 2022
BELIBOR 3M
600
BELIBOR 6M
22
550
20
500
449
444 458
471
459
18
400
16
14
300
12
10
200
8
100
6
85
62 4
47
29 32
0
2
NBS key Average BEONIA BELIBOR BELIBOR BELIBOR
policy rate repo rate 1W 3M 6M 0
2010 2012 2013 2015 2016 2018 2019 2021 2022 2024
Source: NBS. Source: NBS.
When making the decision, we took into account the fact that the effects of past
monetary tightening have been greatly reflected on the cost and scope of private
sector borrowing. I would like to recall that the analysis we presented in one of our
text boxes confirms the efficiency of the monetary policy transmission mechanism
through the interest, credit and expectation channels.
As the key policy rate was kept unchanged for the past months, interest rates in the
interbank money market have stabilised, resulting in almost unchanged prices of
dinar loans in the period since the prior Report. Corporate and household lending
remained low in Q1 this year as well, reflecting the effects of past monetary policy
tightening and the maturing of corporate loans disbursed within guarantee schemes.
Even so, y-o-y growth in total loans picked up slightly relative to end-2023, measuring
1.3% in March. Credit growth was facilitated by growth in household loan demand
and alleviation of banks' credit standards, notably for corporates. The results of our
April lending survey show that almost all banks expect credit activity to post growth
this year, which should pick up additionally in 2025, and a large number of banks
expect growth in corporate and household lending to exceed 5% this and the next
year. These expectations are also founded on the positive assessment of the overall
economic situation in the country.
Preserved financial stability and real sector indicators that suggest a significant pick-
up in economic activity since H2 2023 confirm that with adequate monetary policy,
which was tightened continually, but gradually and in a balanced manner, we
succeeded in ensuring a soft landing.
Chart 8 Lending outlook for 2024 and 2025
(number of banks)
12
10 10 10
10
8
8
6 6 6 6
6
4
2
2
1 1 1 1
0 0 0
0
Corporates Households Corporates Households
2024 2025
Fall No change Up to 5% y-o-y growth Over 5% y-o-y growth
Source: NBS.
The preserved financial stability is illustrated by the high capital adequacy of banks of
close to 22%, with liquidity indicators almost two times higher than the minimum, as
well as the share of NPLs in total loans being kept at the historical low of around 3%.
This was certainly facilitated by the strong regulatory framework for banks that was
implemented even before this multidimensional crisis, as well as the carefully
combined and synchronised measures of monetary and macroprudential policies.
Chart 9 Banking sector capital adequacy and liquidity Chart 10 NPL level and share in total loans, gross principle
(in RSD bn) (in %)
indicators
(in %)
Household sector
500 25
26 3.0
Corporate sector
Other sectors
NPL share in total loans (RHS)
24 2.5
400 20
22 2.0
300 15
20 1.5
200 10
18 1.0
16 Regulatory capital to risk-weighted assets, in % (LHS) 0.5
100 5
Average monthy liquidity ratio (RHS)
14 0.0
0 0
2012 2014 2016 2018 2020 2022 March
2024 2012 2014 2016 2018 2020 2022 March
2024
Source: NBS.
Source: NBS.
According to the flash estimate of the Serbian Statistical Office, y-o-y GDP growth in
Q1 this year accelerated to 4.6%, and according to our estimate, seasonally-adjusted
growth measured 1.1% relative to the previous quarter. On the production side, we
estimate that y-o-y growth in GDP was driven by the rising activity in trade, industry
and construction, with other services sectors also yielding a positive contribution. In
terms of use, growth was driven by domestic demand, where private consumption
and fixed investments gave the largest contributions.
Faster than expected GDP growth in Q1 boosted the likelihood that this year's
economic growth rate will be closer to the central value of the 3-4% forecast range
from the previous Report, therefore we now estimate GDP growth at the rate of 3.5%.
Other relevant international institutions share similar expectations of economic
growth for this year, including the International Monetary Fund, World Bank and
Consensus Economics, and they estimate growth to be among the highest in the
Central and Southeast European region. We expect an additional pick-up in
economic activity, to the range of 4-5% over the next two years, which will be
facilitated by the realisation of investments planned as part of the "Leap into the
-
Future Serbia Expo 2027" programme, alleviated global inflationary pressures and
more favourable financing conditions.
Growth will be driven by domestic demand, with a positive contribution of all
components. Private consumption will increase owing to the continued growth in
employment and wages, notably in the private sector, but without major inflationary
effects given that wage growth will be largely a result of increased productivity.
Chart 11 GDP growth projection
Chart 12 Contributions to real GDP growth
(y-o-y rates, in %)
(in pp)
Change in inventories
12
10
Net exports
Government consumption
10
Gross fixed capital formation
8
Household consumption
GDP (in %)
8
6
6
4
4
2
2
0
0
-2
-2
-4
I II III IV I II III IV I II III IV I II III IV I
2017 2018 2019 2020 2021 2022 2023 2024* 2025* 2026*
2022 2023 2024 2025
Sources: SORS and NBS calculation.
Source: NBS.
* NBS estimate.
Considering that in the past months we heard comments that inflation has eaten up
citizens' living standard, I would like to stress that wage and pension growth and
decelerating inflation have pushed y-o-y real wage growth in January and February to
9.2%, and pension growth to 14.2%. That the living standard is improving is attested
to by the increase in the coverage of the average consumer basket by the average
wage and increase in the coverage of the minimum basket with the minimum wage to
around 94%, the highest level on record. Wage growth and its relationship with
Inflation
inflation was elaborated in more detail in a text box in the current issue of the
Report.
Investments, both private and government, are still an important factor of economic
growth this year, as they boost our economy's output potential. Investment growth is
expected amid a high inflow of FDI, increased profitability in the previous years and
maintained investment confidence, and it will be further facilitated by the loosening
global inflationary pressures and more favourable financing conditions. Also,
investment growth will be under the impact of the realisation of projects in transport,
energy and utility infrastructure.
Chart 13 Fixed investment Chart 14 Real export and import growth
(y-o-y growth, in pp)
(y-o-y rates, in %) (in pp)
25 Government investment
Contribution of net exports to real GDP growth (RHS)
24 3.2
Private investment
Imports (LHS)
Fixed investment (in %)
20
Exports (LHS)
2.5
15 16
1.8
10
8 1.1
5
0.4
0
0
-0.3
-5
-10 -8 -1.0
-15
-1.7
-16
-20
-2.4
-25
-24 -3.1
2009 2011 2013 2015 2017 2019 2021 2023 2025*
2015 2017 2019 2021 2023 2025*
Sources: SORS and NBS.
Sources: SORS and NBS.
* NBS projection.
* NBS estimate.
Despite the anticipated continued growth in exports which will pave the way for
investments in export sectors from prior years and a gradual recovery of external
demand, we still project imports rising faster than exports due to the accelerated
investment cycle and needs for the import of equipment and raw materials, which will
result in a negative contribution of net exports.
A pick-up in investments and the consequent import growth is also one of important
factors why we projected gradual growth in the current account deficit in this and the
following years. This year, we projected it at around 4% of GDP, and in the coming
years at around 5%. In our judgement, the current account deficit will remain fully
covered by net FDI inflows, which was the case in the past nine years as well. This
will ensure the sustainability of our external position and a continued increase in FX
reserves, which are currently at a record-high level of around EUR 25 bn and
significantly above the criteria used for assessing their adequacy.
Chart 16 Current account and FDI projection
Chart 15 Current account and FDI
(in % of GDP)
(in EUR bn)
FDI, net
3
25
Secondary income Primary income
Goods
Services Services Goods
20
Primary income, net
Current account FDI
2 Secondary income, net
15
Current account deficit
1.4
1.2
10
1
5
1.1
0.8 0.8
0.6
0
0
-0.2
-0.4
-5
-1 -1.8
-10
-1.5
-15
-0.7
-2
-0.6
-20
-25
Source: NBS.
-3
2019 2020 2021 2022 2023 2024* 2025* 2026*
Q1 2023 Q1 2024
Sources: SORS and NBS.
Source: NBS.
* NBS projection.
The current account deficit remained relatively low and in Q1 this year equalled 2.3%
of GDP, with a reduced deficit in goods and services trade as a result of the
continued growth of manufacturing exports, a two-digit hike in services exports and
the rebound in agricultural commodities exports on the one hand, and lower energy
imports on the other. The current account deficit was covered by FDI inflows to
Serbia many times over, given that in the first three months of the year they equalled
around EUR 1.3 bn, while including the preliminary data for April, they reached EUR
1.7 bn, thus supporting the continuation of appreciation pressures. Under these
circumstances and in order to maintain relative stability of the dinar vis-à-vis the euro,
in the four months of the year the NBS intervened by net purchasing FX in the
amount of EUR 530 mn.
All of the results I presented, including the reduction in fiscal imbalance and the
downward public debt trajectory, but primarily the resilience our country has shown in
Poor's
the past years, have driven Standard & last month to raise Serbia's outlook for
obtaining investment grade. This is yet another confirmation of our responsible
economic policy conduct in the years riddled with global insecurities and overlapping
global crises. Increasing Serbia's credit rating to investment grade is one of the
strategic goals of the NBS and the Government. Once it is reached, it will ensure that
Serbia is even better recognised on the international investment map and that it has
more favourable conditions for financing the government, corporates and
households.
Ladies and gentlemen, dear colleagues,
We will now take a closer look at risks which, if materialised, could affect the
deviation of achieved inflation and economic activity in the coming period from our
projections, thus by extension impacting our future decision-making.
Uncertainty regarding the materialisation of inflation and GDP projections still largely
stems from geopolitical relations and prospects for global economic growth, as well
as their impact on the global prices of energy and other primary commodities. The
effects of different levels of global prices of oil and primary agricultural commodities
are presented in a text box about alternative projection scenarios. We must underline
that the materialisation of these risks should not have a major impact on our inflation
projection or lead to inflation exiting the target bounds. To a certain extent, the risks
also pertain to the persistence of core inflation globally and the length of monetary
policy tightness by leading central banks. Risks to the projection also arise from the
pace of growth of domestic demand, notably on account of the level of FDI inflow and
investments in infrastructure and the energy sector. As for domestic risks, the
outcome of the agricultural season at home is relevant and, in case of inflation, it
mostly pertains to movements in fruit and vegetable prices, while in case of GDP the
yield of cereals is particularly important. Overall, risks to the inflation projection and
risks to the GDP growth projection for this and the following years are judged to be
symmetrical.
The key message with which I would like to conclude my introductory speech is that
our past monetary policy measures have been efficient and yielded the desired
effects. Our priority is to keep inflation sustainably within the bounds of the target
tolerance band going forward, and to preserve financial system stability, because
along with the maintained relative stability of the exchange rate, this is the best way
in which a central bank can contribute to the certainty of business, strengthening of
macroeconomic fundamentals and ensuring a favourable outlook for our economic
growth. This way we safeguard investment confidence, and support employment
growth and the living standard of our citizens. In line with the achievement of these
objectives and assuming that in the coming period we will "sail through more peaceful
international waters, without major winds and storms", we will estimate when and at
what pace we should begin with monetary policy accommodation. And if it happens
that we are again exposed to storms from the international surroundings, we have
shown in the past years that we are able to navigate even the most severe ones.
Nevertheless, we hope that the years ahead will bring fewer challenges than the
ones behind us, and that this will help us achieve faster economic growth and overall
progress of our country and all of our citizens.
Our colleagues from the Economic Research and Statistics Department will give a
more thorough presentation of our projections, after which we will take your
questions.