Governor for Oslobođenje:The Entire World is Adjusting Steps to Mitigate the Inflation Consequences 1/3/2023 Tweet The end of the last year was considered the end of the year full of challenges, however, this year, the global economy has faced even stronger challenges. How would you describe the year that ended? Quite obviously, the entire world, following the crisis brought about by the Covid -19 pandemic, has faced a new crisis brought about by geopolitical events related to the war in Ukraine and its very serious consequences. The events such as pandemic, wars, natural disasters and other unexpected and sudden situations cannot be foreseen when analyses and forecasts for periods to come are prepared. Stability The entire world is sharing the same destiny and all the countries are trying to respond to inflation and disrupted supply chains. Bosnia and Herzegovina is no exception. So, the year that ended was really difficult and full of challenges both for BH and citizens. From the view of the Central Bank of BH, it was the same and I would like to stress that we reacted to all challenges adequately and on time and managed to preserve monetary stability. The full coverage of the local currency with euro was never questioned. In periods of exceptional pressure of clients on banks, in the very beginning of the war in Ukraine, all the requests of citizens and banks for cash were met. Those were high amounts of KM and EUR cash. It contributed to the preserving of KM stability and confidence of citizens and economy in the CBBH activities. We adjusted to new circumstances, and all the functions, including payment systems were carried out without delays and smoothly. We are recognized by international institutions as an institution which in such challenging periods significantly contributed to the fulfilment of country's obligations in numerous processes and arrangements. Inflation brought about a crisis in the entire world, and we are no exception. Which is the current inflation level in BH, are there any signs of its declining soon? On the basis of the official data from October 2022, and the data on expected price trends of food and oil and domestic and foreign economic activities in the period ahead, annual inflation is expected to remain quite high in the fourth quarter (15.9%), but still slightly lower compared to the third quarter of this year. According to the latest results of current inflation nowcasting model, the expected annual inflation in 2022 could be around 14.0%. Further slowdown of inflation is expected to take place in the first half of 2023. Despite the expected slowdown of inflation in 2023, it will stay significantly higher than the several year long average level of BH. Current medium term projections of the CBBH say that inflation could be 6.1% in 2023, and 3% in 2024. Electric energy prices in the domestic market could have a significant impact on inflation trend in the following year. Should we be afraid of recession? According to available data and projections, we do not expect recession in the following year. In 2023, we expect a significant slowdown of real economic activity, which we currently project at 0.9%. Yet, I have to stress that it is very difficult to provide forecasts as we are currently not in a standard business cycle, and that projections, due to strong uncertainties, are subject to significant revisions. Macroeconomists focus on general medium term trend, and current expectations for BH, the region and the EU are that in 2022, a higher growth is expected than it was anticipated earlier, but also a significant slowdown of economic activities is expected in medium term. Should governments at all levels have been faster related to measures and actions in coping with inflation? Measures were in place, but I would say that citizens may have not felt the effects of the measures due to the non-existence of harmonisation in decision making at all the levels of authorities. I am speaking about harmonised approach for the simple reason that no authority can undertake partial measures which would mitigate such a strong shock of inflation. Inflation is a global problem and the entire world is trying to harmonise some steps and pass measures to mitigate the consequences. Therefore, I am saying that it is very important that all the taken steps should be harmonised, regardless whether stimulations, subsidies or fiscal measures are in question. There are forecasts that inflation will be mitigated next year due to the measures undertaken by the ECB, and that the local authorities, by undertaking additional measures, will help citizens cope with the effects of prices, the structure of which is dominated by energy and food products. After inflation and its effect on the standard of living, citizens are mainly interested in the interest rate trend. Is a higher growth of interest rates expected? In theory, when benchmark interest rates of leading global central banks are increasing, the growth of local interest rates is expected. Required reserves In current environment, banks will certainly have a motive to increase interest rates on loans, partly because a number of the existing loan contracts was agreed with variable interest rates, but this should be at minimal level. We should also take into account that a growth of interest rates on the existing loans could result in a growth of loans with problems in repayment and growth of costs for banks on that basis and additionally decrease demand for new loans. In medium term and long term, the period of exceptionally low nominal interest rates is certainly finished and interest rates will reach higher levels compared to earlier years and stay at higher levels for a longer period of time. The CBBH recently changed the decision on the determination of required reserves, do you expect it to have a positive effect? In the conditions of growing yields on the financial markets of the euro area, the region of ourreserve currency, the euro, against which we have a fixed exchange rate, the CBBH gradually adjusts its fee rates, but at a slightly slower pace compared to the ECB. In accordance with this, the Central Bank of Bosnia and Herzegovina adopted a Decision on amending the Decision on establishing and maintaining required reserves and determining remuneration on the amount of reserves, with the aim of harmonizing with the policy of the European Central Bank and mitigating the impact of the increase in the reference interest rate of the ECB on the operations of banks in Bosnia and Herzegovina. With this Decision, being on since 1 January 2018, on required reserve funds with the basis in the local currency, KM, we calculate and pay out a fee at the rate of 25 basis points, and on funds of required reserve with the basis in foreign currencies and in the domestic currency with a currency clause, we calculate and pay out a fee at the rate of 10 basis points. No fee will be charged on funds above the required reserve. The increase in the fee rates that the CBBH calculates and pays on the required reserve reduces the costs of holding those funds for banks and thereby reduces the effect of transferring those costs to bank clients in terms of higher interest rates on loans, or lower interest rates on deposits. This can result in positive effects for bank clients in terms of potentially lower interest rates on loans and higher interest rates on deposits. Regarding the remuneration rate for assets above the required reserve, by positioning the amount of that rate below the prevailing market rates, the CBBH tries to prevent the excessive growth of those assets in the reserve accounts. Additionally, with such a fee policy, banks are encouraged to use these funds more actively, e.g. for more intensive credit placements in the domestic economy. Can we expect new arrangements with the IMF? A possible new program with the IMF has been discussed for some time. I firmly believe thatour economy would be well served by a new arrangement, as was the case with the previous arrangements. IMF assistance is needed not only in the financial terms, but also to strengthen our domestic reform agenda. Structural reforms would increase the efficiency of our economy and speed up our EU accession process. The information about the sale of gold reserves raised a lot of fuss, do you still think that this decision is justified? Regardless of the still present comments in the public, the Central Bank of Bosnia and Herzegovina considers that the decision to sell a part of the monetary gold from the portfolio is justified and correct. As we have already explained, since March of this year and the outbreak of the war in Ukraine, the price of gold has recorded very volatile trends with a significant downward trend, while the world's leading central banks, the Fed, the Bank of England and the ECB, began to increase their reference interest rates in order to suppress the inflation. When central banks raise the benchmark interest rate, the price of gold decreases as gold becomes less attractive as a non-interest bearing asset. Bonds have the interest income, which is not the case with gold, whose market value changes. In order to position adequately itself in accordance with market changes, the CBBH has reduced the amount of assets that are subject to strong fluctuations of fair value, such as gold. We are already noticing the positive effects of this decision. Our decisions are made by a wide circle of experts based on adequate analyses and projections. In this particular case, in question is one of the gold transactions, a smaller one, and there have been gold transactions before, so it is not the first, and certainly not the last one. I emphasize that in this way the CBBH preserves the monetary stability of Bosnia and Herzegovina, and the guarantee is foreign exchange reserves that amount to about KM 16 billion and which we invest primarily in a safe, and only then in a profitable way. At the Summit of Central Bank Governors in Bečići, it was repeatedly said that the time of cheap money is over, what time can be expected this year? You are right, the era of cheap money and record low interest rates is over. At that time, I stated that central banks cannot solve the issue of oil and energy supplies, but they can influence monetary policy. Confirmation of this is the decision of the ECB, which this year, for the first time since 2011, increased its reference interest rates, and the rate that the ECB has applied to deposits from the level of -0.50%, which it amounted almost until the end of July, now amounts to 2% at the end of December. Economic activity Regarding projections for this year, it is not very wise to give reliable projections, because we are not in a classic business cycle and uncertainties are very pronounced, and significant factors are influenced by global trends. It is certain that the coming year will be very challenging. Based on the latest projections, a significant slowdown in economic activity in the countries of the main trading partners is expected, which will have a negative impact on the demand for domestic products abroad. Evidently, there are also factors that could result in a significant upward revision of the projection of economic activity in the coming years. Primarily, the granting of candidate status for EU membership, especially if it is accompanied by strong reforms in BH, which would lead to a significant growth of economic activity. At the same time, the growth of economic activity would not necessarily be accompanied by the growth of inflation. I believe that, already in the medium term, a serious commitment to improving macroeconomic conditions and the business climate in the country would result in the weakening of negative trends in the labour market and the growth of private investments. This would not only strengthen economic activity in the medium term, but also the long-term economic potential. Allow me to wish your readers and the citizens of Bosnia and Herzegovina a happy and successful new year 2023.
