In addition to the expectations for attaining the historical average for our economy of around 2% in the medium run, we are also discussing with Governor Bezhoska on the banks role in the financial sector stability, the central bank measures for ensuring the citizens easier access to financial services, and thereby their protection…

- The price shocks our citizens faced with were up to two times stronger than those of the EU citizens. Why? 

There are several structural and institutional factors that influence the extent to which inflationary shocks will affect the economy. Our trade openness is extremely high, 140% of GDP, while in the EU it is twice as low, or 70% of GDP, and the more trade-open the economy is, the more exposed to external shocks it is, especially if there are no domestic resources to compensate for those shocks. We, as an economy, are highly dependent on energy imports, while at the same time, energy inefficient. To produce one GDP unit, our energy consumption is three times higher than that of the EU, which is why the energy crisis has affected us so strongly, because energy is an input component in almost every product. If we take into consideration that the shock mainly results from food and energy, their share in our consumption basket accounts about 50% or twice as high as the EU. In addition to structural factors, the measures that the countries have taken to deal with shocks are also very important. The analyses show that in the countries with less targeted measures (tax cuts, etc.), the inflation was lower. But, this requires a large fiscal space and the question is which country can withstand it without significantly increasing the public debt. Additional factors that influence the inflation intensity are the degree of effective competition (in economies with higher effective competition, the price pressure is lower) and the cycle phase of the economy, especially the conditions on the labor market. What is important to emphasize is that although the difference in terms of inflation between us and the EU increased by about 5 percentage points last year, this year the differences have practically disappeared. For example, in October the inflation in the EU was 3.6%, while in our country it was 3.5%.

- When should we expect inflation to return to its previous level?

In our country, the peak or the highest annual rate was registered in October 2022 when it reached close to 20%. Since then, inflation rates have been steadily declining and the latest figures for October and November are 3.5% and 3.1%, respectively. According to our latest, October forecast, the average inflation for the year will be around 9.5%. Next year, assuming that there will be no major external and domestic shocks, we expect that the downward trend will pursue, in line with the expectations for further stabilization of the prices on the world food and energy markets, which this year, as we can see, are significantly decreasing. In the medium run we expect to achieve the historical average for our economy of around 2%. Our expectations are in line with those of the European Central Bank for inflation developments in the euro area and in the EU, which expect the target inflation of around 2% to be reached sometime in 2025. Inflation depends on many variables and the prudent setting of macroeconomic policies is especially important. It is also important to pay attention to structural policies, because they can increase supply, i.e. domestic production and bring it into line with demand, thereby reducing the sensitivity of the economy to some possible future shocks.

- As Governor of the National Bank, what is your comment about how commercial banks have helped companies in this crisis period?  

Despite the shocks and the high level of uncertainty and unpredictability, the banks provided solid credit support to citizens and companies. Credit activity has not stopped, last year it increased by about 10%, while this year there is a certain moderate slowdown, but it is still growing (according to the latest data, the total credit activity increased by about 5%). The credit support to the corporate sector was of great importance, and last year it increased by 11%, given the energy shock and the increased liquidity needs of companies. In the past few years, we have taken a number of measures, including macro prudential and supervisory measures, which contributed to strengthening the capital and liquidity reserves of the banking system, which were particularly important for providing credit support. Currently, the banking system not only has capital adequacy which is the highest in the last 15 years, but the quality of capital is at the highest level, as well. Liquidity is traditionally at a solid level. According to our forecasts, we expect increase in loans of around 7% in the medium term.

- Are citizens motivated to save, because the interest rates on loans are higher than the interest rates on deposits?

The household savings in the banking system have solid rates. Last year they grew by about 6%, and this year they have been accelerating to about 7%, according to the latest available data. There is also an increase in the interest rates on households’ savings, which is especially evident in denar savings. This contributes to the growth of denar savings, which according to the latest data accounts for about 11%, the savings in foreign currency is 3%. We are honestly not surprised, because part of the measures we took were precisely to encourage denarization. Another positive change in the structure of savings is the growth of long-term savings of over 20%, which is another proof for the confidence in the banking system.

- Speaking of commercial banks, they charge literally for everything, a transaction account maintenance, execution of certain e-banking transactions... Does the National Bank have any control mechanism and can the fees be reduced somehow?

For several years now, one of the central bank's strategic goals has been encouraging greater financial inclusion, i.e. easier access of citizens to financial services, and thus protecting the users of financial services. At the beginning of the year, the new Law on Payment Systems and Payment Services entered into force. One of the goals of this Law was to increase the transparency and protection of financial services users, first through direct restrictions of fees paid for certain types of payment services. With regard to the legal limits on fees, the Law gives citizens the opportunity to open a payment account with basic functions for a minimum monthly fee, which currently amounts to 34 denars (or 0.1% of the average in the past 12 months of the average paid net wage in the country), which includes a certain package of free payment transactions. This account is free for citizens from some of the socially vulnerable categories. There are other examples of legal restrictions, such as that banks should not charge any fees for closing and for issuing confirmation for closing a bank account.

Secondly, the new regulation provides larger competition (and thereby contributes to the reduction of fees) through the liberalization of the payment services market, with which, for the first time in our history, payment transactions can be carried out by other non-bank financial services providers (of course, should be licensed by the central bank).

Third, the Law greatly increases transparency, through requirements for banks and other financial service providers to be transparent and explicit in their communication with users so that they can make good decisions based on sufficient information. From the perspective of transparency, the National Bank published on its website a tool so the citizens can be able to compare the fees of 11 services that are used most often. As a central bank, we monitor the situation in the banking system and the implementation of this Law, and for this purpose, we have established a special Consumer Protection and Financial Education Department, which acts upon citizens' complaints, conducts controls and, if it determines non-compliance with the Law, corrective measures are imposed. We also act preventively, through financial education. In cooperation with other financial regulators, we are working on a new regulation for the financial ombudsman, a separate institution that would be directly in charge of dealing with citizens' complaints, regardless of whether they refer to banks or other types of financial institutions. All this shows that citizens and their interest are particularly important in the central bank operations.