Inflation in the Western Balkans will remain elevated in 2023, after peaking in 2022 and showing signs of easing at the start of 2023, the World Bank said in its regular economic report on the region released on April 25.
Consumer price inflation reached 17.4% in Bosnia & Herzegovina between July and November last year. It was 19.8% in North Macedonia, 17.5% in Montenegro, 14.2% in Kosovo and 8.3% in Albania, affected by energy and food prices.
The World Bank noted that at the regional level, food CPI inflation reached 24.6% in October 2022, 16.8pp higher than the previous year. Energy CPI has also been rising, reaching 19.7% in January.
“Trends in core inflation suggest that price pressures remain broad-based. Since mid-2022, core inflation increased in almost all Western Balkan countries,” the World Bank noted.
In North Macedonia, Montenegro and Albania core inflation was the highest, reaching 11% in December 2022, 10.3% in November and 8.6% in October, respectively.
To respond to surging inflation, the Western Balkan countries that have an independent monetary policy have been gradually tightening the monetary policy throughout 2022.
In Serbia, the policy rate has been rising since April in order to contain the larger-than-expected rise in inflation and dampen inflation expectations. The country’s authorities have also made efforts to stabilise the exchange rate in order to contain inflationary pressures emerging from high international energy and food prices.
In Albania, the central bank raised its key policy rate again by 50bp to 2.75% in November, the fifth hike in 2022. At the same time, the Albanian authorities did not try to manage the exchange rate. However, amid expectations of monetary policy tightening, domestic yields on Albanian government securities started to increase.
In North Macedonia, the central bank has been tightening the monetary policy constantly amid rising inflation expectations. By the beginning of February 2023, the central bank has raised the key policy rate nine times, to 5.25%.
Meanwhile, in all three countries the authorities were able to preserve and expand their international reserves. In Albania, they covered around 6.9 months of imports at the end of 2022. In Serbia, reserves increased to a historic high of €19.4bn in December 2022, covering around 5.5 months of imports of goods and services. In North Macedonia, reserves covered around 3.7 months of imports.
The World Bank noted that monetary conditions in the six Western Balkan states are still accommodative, as real policy rates remain negative.
“Despite monetary tightening, real policy rates remained negative for all three countries in the Western Balkans that have own currencies. On one hand, the authorities have further room for maneuver in case global conditions and external energy prices prevent domestic inflation from returning to target and fuel inflation expectations. On the other hand, negative real rates may trigger further euroization of deposits and cause mismatches in bank balance sheets,” the World Bank noted.