On 13 September 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 13 September 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 developments on the foreign exchange market and the liquidity flows in the banking system in August verify the assessments for stabilization of the situation, but given the enduring political uncertainty, as well as in terms of fiscal consolidation, the Operational Monetary Policy Committee decided not to make changes in the monetary policy setup. Hence, it was decided the interest rate on CB bills to be preserved at the same level of 4%, while the supply of CB bills at the auction on 14 September to remain unchanged and amount to Denar 22.000 million.According to published data on estimated GDP, the economic activity in the second quarter grows at a similar growth pace as in the first quarter. Regarding the projection, also in the second quarter the increase is below the expectations, and the main reason for that is the slower rise in the gross investments compared to projections. The available high frequency indicators of developments in individual economic sectors suggest continued growth in the third quarter, but the assessment is based on a very small volume of available data. Overall, the performance in the first half of the year is lower than in the April projection, indicating a potential downward deviation from the projected economic growth for the whole 2016. In terms of inflation, the average annual change in domestic consumer prices in the first eight months of the year remained in the negative zone, amid lower food and energy prices. On the other hand, the core inflation registered positive annual growth rates. Inflation performances so far indicate lower inflation than projected, with the risks to the projection remaining associated with the variable expectations about the changes in world energy and food prices.The foreign exchange market in August continued to register favorable seasonal developments, and as a result, the banks registered net purchase of foreign currency in transactions with customers for the second consecutive month. Compared to the same month in 2015, the developments in August significantly improved, in conditions of high growth in supply by exchange offices and companies, which fully compensated the moderate increase in the companies' demand for foreign currency. In transactions with natural persons, the movements in the demand stabilized, simultaneously registering increased supply of foreign currency from natural persons, because of which the banks registered relatively high net purchase with these customers in August. In conditions of improved foreign currency liquidity of the banks, the supply of foreign currency on the interbank foreign exchange market remained high. In such circumstances, the National Bank intervened by purchasing foreign currency from the market makers in the amount of Euro 49.3 million in August. Thus, together with interventions in the last week of July, the total interventions of the National Bank in the summer period, as of early September, amounted to Euro 68.8 million and made up more than half of the assets sold during the speculative attack on the foreign exchange rate this year. The high foreign currency liquidity in August allowed the banks to place in the National Bank a significant amount of foreign currency deposits in the longer run (6 and 12 months) at positive rates.The latest data on foreign reserves for August show solid increase in foreign reserves as a combined effect of the NBRM interventions by purchasing foreign exchange and the increase in the foreign currency deposits in domestic banks with the NBRM. All foreign reserves adequacy indicators show that they constantly hover in a safe zone. Regarding the external sector indicators, the so far available data on the third quarter point to a somewhat smaller trade deficit than expected and net purchase on the currency exchange market, as an indicator of private transfers within expectations. The scope of available data on the external sector for the third quarter is limited and can not give more accurate picture in this segment.The purchase of foreign currency through the National Bank interventions, enabled increased denar liquidity of the banking system in August, as well. The liquidity was additionally influenced by the the currency in circulation, which after reaching its peak level at the beginning of August, started decreasing in the rest of the month, thus contributing to increased bank liquidity. The banks have placed the excess denar liquidity in deposit facilities with the National Bank, which reached their pre-crisis level.Further stabilization in the expectations of the economic agents can also be seen in the changes in the banks' deposit base. The preliminary data for August showed further growth in household deposits, with the major contribution to the growth of the total deposit base in this month accounting to deposits of the corporate sector. Despite the high monthly deposit growth in August, as a result of the weaker performance so far, the level of deposits remains lower than projected. The data on credit market for August show almost unchanged level of the total loans to the private sector, given further increase in the lending to households and decrease in the lending to the corporate sector. The lending activity so far is in line with the forecast, but given the weaker performances in the deposit potential and present uncertainty, there are risks to the dynamics of lending activity in the next period.The international financial markets are characterized by relatively stable trends, while in terms of macroeconomic performance globally, data on low rates of economic growth were presented. During August, the central banks of Australia and the United Kingdom have increased the support to economic activity by reducing the interest rates, as well as by additional measures for monetary easing. The market movements were influenced by expectations for additional measures also in this direction and by the ECB meeting in September. On the other hand, in the US the expectations that the FED will take further steps to normalize monetary policy by the end of the year prevailed, on the backdrop of favorable developments in the US economy, especially the labor market.The economic and the financial conditions, as well as the assessment of the present risks show that the current monetary setup is appropriate. Following the measures taken by the NBRM at the beginning of May, the latest data show a significant stabilization of movements, which is expected to continue in the next period. However, the uncertainty associated with domestic political developments and global environment is still present and further emphasized after the United Kingdom voting to exit from the European Union. The NBRM will continue to closely monitor the developments in the period ahead, and if appropriate, it will accommodate the monetary policy for successful achievement of the monetary objectives.
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