On 12 April 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 12 April 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.The assessment of the economic and financial conditions showed that the current monetary policy setup is adequate and the Operational Monetary Policy Committee decided the CB bills offered at the auction to be in the amount of Denar 25,500 million, at an unchanged interest rate of 3.25%. The latest indicators suggest that the domestic economy continues to grow at a solid pace, supported in part by the lending of domestic banks. Economic recovery takes place in the absence of price pressures or pressures in the external sector. Foreign reserves are still at an appropriate level, sufficient to cope with any unforeseen shocks in the future. The effects of the domestic political developments are assessed to be limited. Yet, uncertainty can still be observed in the surrounding, thus creating risks for the period ahead. Against such background, the direction of monetary policy in the next period will depend on the stabilization of domestic political context and its effects on the economy, as well as on the changes in the external position and the effects on foreign reserves. The latest macroeconomic indicators do not reveal major changes in the monetary policy setup. In terms of economic activity, the annual GDP growth for the fourth quarter amounted to 3.9%, whereby the growth of GDP for the entire 2015 amounted to 3.7% and was moderately higher than projected. Available data for the first quarter of 2016 point to continuation of the solid growth, amid favorable developments in key sectors of the economy. Yet, notwithstanding these performances, the uncertain global recovery, particularly unfavorable trends in the global metal market and the uncertainty arising from the domestic political upheavals remain to be the risks that may influence the pace of future recovery. In terms of inflation, data for March registered a decline in the general level of prices in the first three months of the year, of 0.1% annually, on average. The fall in prices was due to the decrease in energy and food prices, while core inflation continued to rise. The performance was lower than expected and along with the downward revisions of the assumptions underlying import prices of energy and food, continued to point to downward risks to the inflation projection for this year. However, one should bear in mind the great uncertainty clouding the future movements in world oil prices and the possibility of sudden changes in this category. Recent foreign reserves data (adjusted for the effects of price and exchange rate differences and price changes of securities) as of March show that they have been moderately increasing since the beginning of 2016, versus expectations for their reduction in the October projection. The analysis of foreign reserves adequacy indicators shows that they continue to hover in a safe zone. The foreign exchange market registered stable movements, whereby the part of the net sale of foreign currency for companies was compensated by the higher supply of foreign currency from currency exchange operations, especially in the period of the Roman Catholic Easter. The supply of foreign currency on the interbank foreign exchange market increased, while the foreign exchange rate moderately decreased. In such circumstances, the National Bank did not intervene with market makers on the foreign exchange market. The trade deficit data in the first two months of the year are better than expected, while indicators of private transfers show no deviation from the projections. However, the period to which data refer is very short to draw more reliable conclusions. The preliminary data for the credit market for March 2016 point to a continuation of the monthly growth in loans, which amounted to 0.9% on a monthly basis which is slightly faster compared to the previous month. Most of the loans are directed to the household sector, and corporate loans registered a moderate growth. The annual growth rate of total loans in March was 8.4%, which is moderately above the projection for the first quarter of 2016. Regarding the deposit potential, total deposits continued to grow also in March 2016, whereby their annual dynamics is above the expectations for the first quarter, as part of the October projections. In March, the international financial markets were mainly influenced by expectations for increased monetary incentive by the ECB, relatively favorable indicators for the USA and the growth in oil prices. Surprise to market participants was the adopted comprehensive set of mitigating measures by the ECB and the exclusion of the possibility of further reduction in interest rates. Amid further risk perceptions from the global economic and financial developments, the meeting of the Fed had a more relaxing tone than expected, so that it intensified forecasts for delaying further increase in the interest rates. The US dollar decreased the value against the euro, according to these steps of the central banks. In the domestic economy, the autonomous factors acted towards moderate decline in banks’ liquidity, and accordingly, banks reduced excess liquidity invested in monetary instruments. Also, banks provided part of the required liquidity on the money markets, where in addition to interbank loans, there was an active trade with short-term securities. Overall, recent developments suggest similar macroeconomic landscape as projected in October, with solid economic and credit growth, absence of price pressures and balance of payment position that ensures maintenance of foreign reserves at an adequate level. The fundamentals of the economy remain solid. Risks have arisen from both the external and the uncertain domestic surrounding. Exogenous factors remain associated with the possible changes in the pace of recovery of the global economic growth, as well as with the movements in the prices of primary products in world markets. Despite the relatively small and limited impact of domestic risks thus far, the possible continuation of uncertainty related to political developments tends to spill over into the economy due to the restraint of both domestic and foreign investors. However, some risks have been mitigated by the NBRM measures in the reserve requirement instrument, aimed to further support long-term savings in domestic currency, and therewith to support the process of denarization of the economy. The purpose of the December set of measures aimed to slow down the rapid growth of long-term consumer loans was the same, and also facilitates the conditions for funding of the corporate sector, including SMEs. The non-standard measure in reserve requirements for systemically important sectors of the domestic economy aims to further support lending to net exporters and domestic producers of electricity. The NBRM will continue to closely monitor the developments in the period ahead, and if appropriate, will make adjustments to the monetary policy aimed at successful achievement of the monetary policy objectives.
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