Governor for Avaz: Investments which will ensure the continuity of our energy independence are late 7/27/2023 Tweet During 2023, we expect inflation pressures to weaken, with the inflation remaining unpleasantly high. The primary objective of the CBBH, the same as in all the previous years, is maintaining the stability of the local currency, with the full coverage in foreign currency. Governor of the Central Bank of BH, Senad Softić, has spoken for “Avaz” about inflation pressures on BH economy and citizens, nowcasts for this year, and the fact that, despite the inflation slowing down, the prices are still increasing. We have also asked about the main challenges for BH economy, if politicians are still making pressures that the Central Bank reserves should be allocated for budget spending, and Softić has also explained the reasons for introducing the local interest rate. What are your estimates regarding inflation trends by the end of this year? During 2023, we expect inflation pressures to weaken, with the inflation remaining unpleasantly high. In 2023, we project the total inflation at 7.7 per cents, on the basis of the medium term macroeconomic projection from May 2023. In the first five months, according to official statistics, inflation was 10.2%. Our nowcasts of core inflation indicate that currently, most inflation pressures are coming from domestic economy, which is a trend in the countries of the region but also in the EU. In other words, price shocks brought about by turbulent food and energy prices in international markets have been absorbed, so we expect that headline inflation will be slowing down faster that core inflation, at least in the first three quarters of 2023. Our nowcast of the headline inflation for the first half of the year is currently 9.7% and that for the first nine months is 8.1%. Regarding core inflation, nowcast for the first half of 2023 is currently 6.0%, while the first preliminary nowcast for the first nine months is 5.6%. Interest rates Despite the inflation going down, the prices of most products and services are remaining at the same level. Which are, in your opinion, reasons for such trend? Slowdown of inflation does not mean that prices are going down, but that they are increasing slower compared to the reference period. The prices of goods and services consumed by the average BH citizen were higher by 14% in 2022 compared to the year before. It significantly decreased the real available income of a considerable part of households. Inflation pressure was somewhat weaker, but still strong, in the first five months, so the increase at the annual level was additional 10.2% on the already high prices. If the general perception is that “the prices of most products are remaining at the same level, and inflation is going down”, there are several possible reasons. The first is that the structure of goods and services consumed by the average citizen is different compared to the reference period. It is quite possible, the adjustments on the basis of total household spending survey being a regular statistical procedure in measuring inflation. The other possible reason is the observed narrow categories of goods and services. For example, only basic food products. The third reason could be that we are speaking about real available income, i.e. how much and what can be afforded for a monthly wage, compared to earlier periods, and not about the current change of average consumer prices. Delayed spending on luxury goods is not mentioned any more, but focus is on available income for spending on the basic needs of citizens. Without a growth of real available income, desirably on the basis of the growth of activities which do not generate additional inflation, i.e. improvement of competitiveness through a carefully designed set of reforms, the use of EU funds for structural reforms etc.., it is really hard to expect an average citizen to perceive inflation as something which will pass. We must not forget the fact that the period of cheap money is behind us, and that it is realistic to expect interest rate growth in medium term. How would you assess the performance results in the first quarter? The primary objective of the CBBH, the same as in all the previous years, is maintaining the stability of local currency, with the full coverage in foreign currency. From 2014, when the ECB introduced negative interest rates, until 2022, were very challenging years for the CBBH. All the time, we were managing the foreign exchange reserves fulfilling the objectives of safety and liquidity, and profitability, to the extent possible, with adequate management of the related risks. In mid last year, the ECB, whose measures have the strongest impact on the CBBH, after years long period, made a change in its monetary policy from expansive to restrictive. On one hand, a possibility appeared to reinvest the foreign exchange reserves at much more favourable terms, and on the other hand, the CBBH faced the consequences of growth of yields on the portfolio value. I point out that we started the process of restructuring and shortening of portfolio duration on time, which is why we minimized oscillations in portfolio fair value and operated profitably. The evidence is the data on profit for the first six months of 2023, amounting to around KM 107 million, which is higher than the total recorded profit in the period from 2016 to 2022. Income from the foreign exchange reserve investment contributed most to this result. The foreign exchange reserves level decreased in the beginning of the year, which is quite usual for the first quarter, but as early as in the second quarter, the foreign exchange reserve level was harmonised with years long trends and a growth was recorded. It should be stressed that the net change of the government sector debt, including new debts and foreign debt repayment, is currently one of the key factors impacting the foreign exchange reserve level. The last year’s decision on the sale of gold brought about criticism of some economic analysts. What are the plans in this segment of the foreign exchange reserves for the period ahead, as some countries have been purchasing gold intensively for some time? The decision on the last year’s sale of gold proved to be timely and well justified. Related to future plans, all our activities, as by now, will depend on market trends and our decisions on the CBBH strategic positioning. Economic challenge At the recent conference in Dubrovnik, you have mentioned some of them, which are the main challenges of BH economy at this moment and how can they be overcome? Yes, I have mentioned labour market frictions as the currently strongest economic challenge. We are facing the ageing of population, long-term unemployment and continuing and increasing emigrations of highly educated staff and qualified workers towards Western Europe. I think it is very important to harmonise tax burdens on labour and increase the mobility of labour in the area of entire BH. Also, as a country which is a net exporter of electric energy, and the country not depending on the imports of natural gas, we were able, rather easily compared to other countries, to mitigate the shock of the war in Ukraine with regard to gas prices in Europe. Our manufacturing industry even had some benefits from significantly lower prices of electric energy than those of our main trade partners, particularly in the EU, and disruptions in global producer and supply chains, as resumed exports of processed goods increased significantly. It had a positive contribution to the economic activity in the country. However, we are still relying strongly on non-renewable energy sources. I think it will be a double challenge for us. Tax on energy from non-renewable sources, which will be applied in the EU from 2026, will strongly impact our source of electric energy, but also the price competitiveness of our goods. We will also start facing the challenges of replacing the existing plants, especially thermal plants, as early as in medium term, as their planned duration periods expire. We are already very late regarding the investments which will ensure the continuity of our energy independence in medium and long terms, which might influence the anyway low real available income of households, but also the price competitiveness of our companies. Finally, there is the issue of procyclical fiscal policy in current circumstances of high inflation. I completely understand the challenges which the fiscal authorities were facing during the previous period, first the pandemic, and then the implementation of the measures to mitigate inflation effects on the most vulnerable groups of population. Yet, I believe that in the period ahead, it is crucial to make a change from the measures and policies resulting in low fiscal multipliers and growth of current spending, towards public investments increasing economic activity, both direct and potential, without generating additional inflation pressures. Numerous pressures In earlier years, there were many pressures of some politicians to start using “excess holdings” of the Central Bank of BH. Are there such pressures today, when public debt of both Entities increased significantly, while RS is meeting its liabilities with increasing difficulties? The CBBH has continued to perform its tasks according to its authorities. On every occasion when we received such enquiries, the CBBH explained patiently and thoroughly to the general public and all the relevant local and international parties why such enquiries are wrong or even harmful. We have also had the full support of relevant supranational institutions, rating agencies and business community, which in time decreased the intensity of successive attempts to directly instruct the CBBH how to perform its key tasks and legal authorities. Our transparency and clear communication, as well as a strong confidence of the public in the CBBH and its monetary policy helped us to resist these challenges. Reference rate Preparations for the introduction of the local reference interest rate have been going on for some time. Does it mean the abandoning of EURIBOR? Which are the reasons for such activities and what will it mean for banks, i.e. citizens of BH? The purpose is to make available to banks the reference rate which they can use for the adjustment of variable components of prices of financing sources in financial contracts. So, banks will have a choice which rate to use, which does not mean that the use of EURIBOR will be abandoned or forbidden. By using this rate as the reference value for the adjustment of variable part of interest rate in loan contracts, banks financed mainly from local sources will be able to better manage interest induced credit risk arising from a strong growth of interest rates, and also the risk of maintaining stable net interest margins. The advantage for clients is that interest rates on loans will be adjusted to the real price of money in the local market or, in other words, as long as the obtainable deposit interest rates are low, i.e. the lending interest rates will not be increasing considerably either.
