Inflation in Belarus has fallen, but that has less to do with central bank policy and more to do with the fact that the government has fixed prices.

“In February 2023, inflation decreased further. Nevertheless, this slowdown was caused more by direct price regulation than by market conditions. In this regard, a downward trend is expected to continue in Q1 2023, followed by a resumption of CPI growth by the end-2023,” Raiffeisen Bank International (RBI) said in a note.

The embattled Belarus government is struggling to cope with the effects of multiple rounds of sanctions imposed by the EU after the brutal crackdown on mass protests that were sparked by the falsified presidential elections in August 2020. More sanctions were imposed after Belarus President Alexander Lukashenko backed Russian President Vladimir Putin and his invasion of Ukraine just over a year ago.

February's inflation totalled 11.7% year on year versus 12% y/y in January 2023, but consumer price inflation (CPI) reduction has only been possible after the implementation of strict administrative price regulation in mid-autumn last year.

One of the measures to cause soaring inflation was the reintroduction of Soviet-era price controls on basic products. The government is actively using this approach to slow down the annual price growth for almost all goods.

As a result, food prices rose by 13.3% y/y in February 2023 compared with a 13.6% y/y increase in January. The strongest growth inflation was of services costs up by 7.4% y/y, compared with an 8.3% y/y gain a month earlier, while non-food goods prices remained flat at 12.8% y/y.

Seasonal effects had an impact on the vegetable and fruit costs, which rose by 10.6% month on month and by 3.6% m/m respectively. A significant contribution to the higher prices was made by an 8.8% m/m surge in the cost of tourist services, as well as a 6.6% m/m hike in the housing and utilities sector. However, monthly inflation picked up from January's 0.8% to 1.3% in February 2023.

“Core inflation amounted to 12.5% y/y in February 2023. The ongoing 2022 trend, with core inflation exceeding CPI, is also an indication of persisting administrative price controls in the consumer market,” RBI said.

The positive effect of administrative pricing regulation, along with a low 2022 comparison base, is expected to support inflation decline to 10% y/y or even lower in Q1 2023. According to the official forecast, the government anticipates inflation reducing to single digits this year, RBI reports.

The government expects inflation to reduce to single digits this year, while analysts predict a rise of up to 12% y/y.

“We remain quite conservative in our expectations and believe that increasing devaluation expectations and EU/US sanctions will pressure inflation rates. Special attention should be paid to foreign trade results, which showed a significant deterioration (exports fell by 10% y/y, imports grew by 5.5% y/y and $0.2bn goods' deficit returned) in January 2023,” RBI said.

A similar picture is visible in foreign trade of services: exports decreased by 15.6% y/y, imports grew by 2.8% y/y, but still, a surplus in services allowed keeping $0.06bn total foreign trade positive balance.

“Foreign trade deterioration will add more pressure on the domestic FX market and contribute to BYN depreciation against USD, pushing the consumer import costs and consequently prices in general up,” RBI said.

To curb inflation, the National Bank of Belarus has reduced the key rate twice since the beginning of 2023 – from 12% to 11.5% in January and further to 11% from March 1, 2023. The regulator may lower the key rate to 10% in 2023 to support the real sector and increase the availability of loans for state-owned enterprises,” analysts believe.

While inflation may continue to decrease in the first quarter of 2023, Belarus will need to closely monitor its foreign trade results and maintain tight monetary policies to manage the inflation rate effectively.