Governor Tabaković's opinion piece “Factor of greed in various forms and inflation”, published in the Svet bankarstva i investicija magazine, June 2023

Understanding the causes of inflation is the key to fighting it — now and in the future. In this struggle, we are not imitating anyone, we are forging our own path in curbing inflation and contributing to economic growth. Because measures and decisions affect real life, standards and political stability. We will persist in this because we believe that in the era of globalisation and fragmentation, it is most important to find one's place and the right measure when making decisions. By creating buffers and anchoring expectations, we prove our independence and work in the general interest and for the common good.

We talked a lot and in detail about the causes of inflation in the previous months because, along with understanding, clear communication is a crucially important instrument in the fight against it. But on this occasion, I would like to point out one of the factors that is being talked about more and more loudly both in professional circles and among economic policymakers, and which we have been pointing out publicly for years – the factor of greed in its various forms.

The whole world, including Serbia, which cannot be an isolated island, is a victim of money printing that has been going on since 2008, when, whether we like it or not, capitalism ceased to be capitalism in theory and when the losses created by the financial sector by the production of various derivatives became a category that is distributed to the total population, whereas profits are shared individually within the financial sector.

Inflation would have flared up even if there had been no conflict in Ukraine because that excess money had to appear at some point, and we wrote about it in 2018 as well – I personally spoke about it at the BIS in Basel, that more than 50% of inflation in Serbia is a consequence of such central bank behaviour in a globalised economy.

Since 2008, starting from the Fed to the ECB, we have witnessed an unconventional monetary policy, guided by money printing and various instruments. You can call them quantitative easing or whatever you want, but it is an excess of money in circulation, which, however hidden in some cracks and sinkholes, has to surface at some point and cause inflation. Why wasn't that printed money seen for a long time – in different variants, whatever you call them, they are surplus in circulation – it wasn't seen because it mostly went to the selected few – large corporations that invested that money in buying their own shares and in buying their competitors. And anyone who has followed what the NBS does and writes, including me personally, knows that we have said that there will come a moment when that excess money will appear in circulation.

By printing so much money, the big central banks failed to raise inflation to the desired level of around 2%. And why is this so? Because since 2008, bankers literally became followers of the markets that delivered their expectations to the central banks. Instead of leading the fight against inflation and managing the markets by influencing inflation with their rates and instruments on hand, a large number of these important central banks started following the demands of the market and now it is almost as if the markets are dictating what interest rate central banks will announce at the rate-setting meeting each month. Serbia did not emulate either the introduction of negative interest rates or the policy pursued by those large central banks, although we were watchful of their every move. Knowing the specificities and structure of our economy and appreciating the history remembered by the generations that survived hyperinflation, we manage our measures so that they are the most effective. Low inflation, i.e. price stability is our primary objective, but financial stability is inseparable from it, along with maintaining economic growth. We are proud of the fact that, despite the circumstances, we have lowered the level of NPLs to 3%. What does this mean? When the level of NPLs is so low, free funds remain that can be placed both with citizens and businesses, and through credit growth, we influence economic growth, which is not a picture to show off, but the sum of citizens' income from which they can finance their needs.

We do not dispute for a moment that in the average inflation the highest expenditure is for the price of food and that those citizens who spend the largest part of their income on food are precisely the ones most affected by this.

The NBS has regular communication with key retail chains and uses every opportunity to remind them that the increase in cost-push pressures and global inflation growth should not be used as an excuse for an unjustified increase in profit margins, and thus retail prices, because this then requires a stronger monetary policy response.

We can all contribute by taking care that the individual interest of one group of people or one lobby does not become the generator of the inflationary spiral. We have been warning all along that the downward trajectory of food inflation, which we expect until the end of the projection horizon, could possibly be mitigated by an imperfect market structure on the supply side, i.e. by the lack of stronger competition in this segment. No one has the right to cause long-term damage to everyone by creating a sense of insecurity with their irresponsible behaviour or selfish, short-sighted interests.

In principle, profit margins increase in periods of economic expansion and decrease in periods of economic slowdown, i.e. in accordance with demand movements. In periods of high demand, it is easier for all actors in the production and distribution chain – from producers, through processors, to wholesalers and retailers – to pass on their increased costs to the final consumer, while in conditions of reduced demand they are forced to compensate for a part of the increased production costs by reducing their own margins. However, when it comes to the food market and food prices, their specificity is reflected in the fact that the demand for food is less price elastic than other groups of products, which makes it easier for increased production costs to be transferred to a greater extent to retail consumer prices. Retail chains and sellers generally took advantage of that moment, and I have emphasized this several times in recent months, illustrating with the example of coffee – that not all participants in Serbia’s economic life are equally aware that immediate and small gains produce much greater harm.

I will repeat that those who sell products at a higher price while at the same time those products are available at a much lower price in other retailers are forgetting the basic premise which made Walmart one of the largest retail chains in the USA. Their philosophy, which they convey to their employees, is: "We do not hire or fire you as owners and shareholders, but as customers to whom you are kind, but also the price for which we sell them goods."

That is why we regularly meet with large chains and take all other measures at our disposal to contribute to inflation reduction.

Some say that the NBS was too late with its measures. I am always happy to respond to that claim. We did not start influencing the lowering of inflation when it was announced as an increase in the key policy rate, which was at the level of 1%. We started tightening monetary policy back in October 2021 at variable repo auctions, which were introduced at my initiative as a specific feature of Serbia's response on a weekly basis and adjustment of excess liquidity. We did not withdraw excess liquidity at the key policy rate because that would be expensive, both for the NBS and for the state, while it would be ideal for the banks to deposit excess money with the NBS and not invest in loans. Do you know the difference: in October, we paid 0.11 to banks when withdrawing excess liquidity, while the key policy rate was 1%. And we raised that executive rate on a weekly basis and thus tightened monetary conditions, until the repo rate became almost equal to the policy rate, and only then did we start raising the key policy rate from April onwards. Do you know why? Because I don't try to please anyone and I am not prone to jumping on the bandwagon. I am proud that we work in an uncommonly objective way and that there is a rare type of cooperation between the NBS as the monetary authority and the fiscal authorities and executive bodies, which helped us to a great extent so that in such challenging circumstances inflation is Serbia is not even higher than it already is. Coordination of monetary and fiscal policy, a responsible approach of the NBS in adopting measures, increasing the key policy rate and before that the executive rates at repo auctions as well, in addition to macroprudential measures, whereby we influenced cash loans, introduced the possibility of rescheduling other loans – we are doing all this in order to bring inflation to a lower level as quickly as possible, bearing in mind again that we depend on the international environment, that we depend on the agricultural season, but also that we depend on our responsibility towards the citizens.

What has always been our goal? To create buffers for difficult times. We ended the previous year with EUR 1 bn of purchased foreign currency in the interbank foreign exchange market so that we could react when needed, and to make sure that the dinar does not strengthen too much. From the beginning of the year, the NBS intervened on the purchase side in the amount of more than EUR 1.4 bn net. From 2008 to 2012, the NBS ended each year as a net seller of foreign exchange. Since 2017, only one year has the NBS ended as a net seller of foreign exchange, while all other years have ended with a positive performance and an increase in foreign exchange reserves based on interventions in the interbank foreign exchange market – a way that does not cost, and is the cheapest and most sustainable one. We were able to achieve this because we provided a predictable environment, where foreign direct investors come gladly and where we have an inflow of portfolio of investments as well. But when someone invests in the construction of a factory here, it is the best proof of long-term trust in the environment we have created as a country and all of us together, with a wish to show that in this country, even in the most difficult circumstances when it is not easy to keep things under control, it is still possible to work and earn money and to ensure a better standard and a better life for all our citizens.

Governor's Office