On 13 October 2015, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the domestic economy, the developments in the international and domestic financial markets, the developments in the banking system and the latest macroeconomic indicators in the light of the monetary policy setup
On 13 October 2015, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the domestic economy, the developments in the international and domestic financial markets, the developments in the banking system and the latest macroeconomic indicators 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 economic activity 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 being maintained at an appropriate level, sufficient to cope with any unforeseen shocks in the future. The effects on the domestic economy associated with the domestic political developments and the economic and political developments in Greece continue to be assessed as limited and mainly materialized through the expectations channel. Yet, uncertainty in the surrounding has still been present, creating risks for the period ahead. Against such background, leaving the zone of accommodative monetary policy in the next period will depend on the further stabilization of domestic shocks and their 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 point to major changes in the monetary policy setup. After the GDP growth of 2.6% in the second quarter, which is consistent with the April projections, the high frequency data suggest continuation of this pace of growth in the third quarter. Despite the solid pace of growth, the risks of prolonged effects of domestic developments and changes in the global environment are likely to slow down economic growth in the second half of the year, compared with expectations. In September, the general price level decreased on a monthly basis, given the fall in food and energy prices, whereas core inflation accelerated. On average, in the first nine months of the year, the general price level in the domestic economy shrank by 0.3% on an annual basis, due to the fall in prices of energy component. In September, inflation was below projections. These performances, along with the new expectations of lower world prices of energy and food products compared to the April assessments, create downward risks to the inflation projection. Frequent changes in the expectations about the prices of primary products indicate that the uncertainty about the future movement of these products is significant, and the possibility of sudden changes in these categories is high.
According to the latest available data, in the third quarter of 2015, foreign reserves declined, with a slight decrease also registered in October. Analyzing the factors of change, the decline in reserves during this period was primarily due to the regular servicing of external liabilities by the government, and less to the net sales of foreign currency on the foreign exchange market by the NBRM. However, the foreign exchange market has been stable for a longer period of time, and the NBRM does not intervene by selling/purchasing foreign currency. Available external sector indicators show that trade deficit and private transfers, as key components of the current account, have still been moving within the projections. The analysis of foreign reserves adequacy shows that they continue to move in a safe zone, and taking into account the expected external sector developments, the foreign reserves are expected to remain at a comfortable level in the period ahead.
The liquidity of banks increased in September under the influence of autonomous factors, wherefore the banks showed an increased interest in placing excess liquid assets in the National Bank. On the money markets, the volume of trading in deposits was relatively high and the interbank interest rate remained stable. In September, banks also traded in securities on the secondary market, thus additionally increasing the turnover of this segment. The foreign exchange market developments were mainly influenced by the demand for foreign currency associated with the payment of dividend to foreign shareholders, which was reimbursed by the foreign assets of banks and through transactions on the interbank forex market.
The preliminary credit market data for September showed acceleration of the monthly growth of total loans to the private sector. The credit support was directed towards the households, as well as the corporate sector, where after two months of decrease, in September, the loans surged. The annual growth rate of total loans in September was 8.9%, which is somewhat lower than projected. In terms of deposit potential, preliminary data as of September show minor increase given the growth of household deposits. The performances in the total deposits in September were weaker than projected, and on an annual basis, they increased by 5.7%, which is significantly weaker growth than projected. Such changes in deposit potential have increased downward risks to the projected growth by the end of the year and indicate potential effects on savings of the endogenous and exogenous shocks, present in the past.
The developments on the international financial markets in September were affected by the activities on the globally influential central banks. Since the Fed did not increase interest rates at the September meeting, the beginning of normalization of monetary policy remains uncertain. The indicators for the euro area were also in the focus of interest of market participants, given the ECB's announcement for extended application of the securities purchase programme or potential increasing of the monthly amount for purchase of securities.
Generally, in the period since the latest April projections, due to domestic and external risks, the environment was uncertain, yet in the recent period, the uncertainty has reduced. For now, the latest macroeconomic indicators and assessments do not point to major changes in the environment for conducting the monetary policy. The fundamentals of the economy remain solid. Foreign reserves adequacy indicators remain within the safe zone. Economic growth is solid and there are no price pressures. Credit market developments have been generally favorable for a longer period of time, suggesting relatively efficient transmission of the monetary measures undertaken so far on the credit activity and more stable expectations of domestic banks. Changes in the setup of reserve requirement instrument in August are expected to further prompt long-term household savings in domestic currency and to create room for accelerating banks' lending activity. The latest data on the currency exchange market show stabilization of expectations and so far confirm the conclusion about limited and temporary effects of domestic political developments and developments in Greece on the domestic economy.
However, there is still an ongoing uncertainty, so the NBRM will continue to monitor closely the future macroeconomic developments and the possible materialization of risks and will accommodate the monetary policy accordingly.
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