On 10 May 2016, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the domestic economy, the developments on the international and domestic financial markets and the indicators of the domestic economy in the light of the monetary policy setup
On 10 May 2016, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the domestic economy, the developments on the international and domestic financial markets and the indicators of the domestic economy in the light of the monetary policy setup.
After the increase in the interest rate from 3.25% to 4% in the beginning of May, in response to the increased demand for foreign currency and pressures on banks' deposit base due to non-economic reasons, at this meeting of the Committee it was assessed that the monetary policy setup is adequate and there is no need for further changes. At the meeting of the Committee, the recent developments in the context of the latest macroeconomic projections were again reviewed. The statement that the economic fundamentals are sound was maintained, in the absence of major imbalances in the economy. The pressures on the foreign exchange market and banks' deposit base, in the second half of April and at the beginning of May, were solely due to deteriorating expectations and reduced confidence of subjects, given the continued political crisis.
All previous, available macroeconomic indicators point to solid economic growth, which is partly supported by the banks' lending activity. Inflation data for April point to a further decline in prices, amid lower prices of food and energy, while core inflation continues to move in the zone of moderate positive annual changes. In the external sector, the current account deficit remains moderate, with positive spillover effects from structural changes in the export sector and the narrowed energy deficit, while the external financial inflows remain solid. The pressures on foreign reserves, present in the recent period, reflect the behavior of domestic entities, whose propensity to hold foreign currency, amid unstable political context, has significantly increased. Despite the interventions on the foreign exchange market, all reserves indicators show their adequate level, enough to deal with shocks.
In April, under the influence of autonomous factors, the liquidity of the banking system recorded a high monthly decline of Denar 7.035 million. The National Bank interventions on the foreign exchange market had the largest impact for the reduction of banks' liquidity, through which foreign exchange liquidity was provided to meet the increased demand by natural persons for foreign currency and foreign cash. The growth of currency in circulation also contributed to the reduction of banks' liquidity. The dynamics of currency in circulation during the month, despite the seasonally higher demand before the Easter holidays, resulted from the increased demand for Denar cash amid uncertainty from the political crisis.
Seen dynamically, the liquidity significantly decreased in the second half of the month, when the uncertainty related to the political situation in the country increased, which was followed by speculations about the stability of the banking system and the devaluation of Denar exchange rate. In such conditions, the propensity of economic agents for holding foreign currency increased. Natural persons significantly increased the demand for foreign currency, which created pressure on the foreign exchange market (reflected by converting Denar deposits in foreign currency and their withdrawal from banks) and pressure on the currency exchange market of banks (reflecting high sale of banks of foreign currency to natural persons, amid the inability of exchange offices to meet the high demand for foreign currency, due to the reduced purchase of foreign currency). Having in mind these developments on the foreign exchange market, in April, the National Bank provided banks with the necessary foreign currency liquidity amounting to Euro 77 million. Since the beginning of May, there was a stabilization of the demand for foreign currency on the foreign exchange market, which caused reduced interventions for sale of foreign currency by the National Bank.
Given the withdrawn liquidity from the banking system in the previous period, mainly on the basis of interventions on the foreign exchange market, the Operational Monetary Policy Committee estimated that the demand for CB bills at the auction which will be held on 11 May will be lower than the due amount of about Denar 3,000 million. Consequently, it was concluded to offer total amount of CB bills of Denar 22,000 million, at an interest rate of 4%.
Risks are still estimated to be unfavorable. This applies especially to domestic political risks of which the indicators of the domestic economy and deviations in terms of projections will depend, and with the basic and alternative macroeconomic scenario, published in the previous press release of the NBRM. Risks of the external environment are unfavorable, which remains uncertain. The NBRM, as before, will continue to closely monitor the developments in the period ahead, and if appropriate, will make appropriate changes in the monetary policy to fully stabilize the situation and the expectations of economic agents for successful achievement of the monetary policy objectives.
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