On 14 April 2015, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the banking system, the developments on the international and domestic financial markets and the latest macroeconomic indicators
On 14 April 2015, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the banking system, the developments on the international and domestic financial markets 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 it was decided the CB bills offered at the auction to be in the amount that falls due (Denar 25,500 million), at an unchanged interest rate of 3.25%.
The economy has still been recovering at a solid pace, in part supported by the lending of the domestic banks. Economic recovery takes place in the absence of price pressures. These developments indicate that there is a suitable environment for a sustained recovery of the private sector, and it was again assessed that the current support of the local economy through the monetary policy measures is sufficient. Leaving the zone of accommodative monetary policy in the period ahead will depend on the changes in the external position of the economy and the effects on foreign reserves.
The latest macroeconomic indicators do not point to major changes in the monetary policy setup. Regarding the economic activity, the annual growth of GDP for the fourth quarter was 2.7%, which is in line with the expected economic growth in the October cycle of projections. Domestic demand and exports were the main generators of growth, amid moderate growth in private consumption and investment and fast growth in export activity. Indicative high frequency data for the first quarter of 2015 point to further growth of the domestic economy, at probably a similar pace as in the previous quarter.
In terms of inflation, in March, a significant slowdown in the annual decline in prices to 0.3% was registered (compared to 1% in February). On average, in the first three months of the year, the general level of prices in the domestic economy shrank by 0.9% on an annual basis, as a result of all three components of inflation, but with predominant contribution of the lower prices in the energy component of inflation (amidst falling world oil prices). Inflation is slightly lower than projected, and changes in external assumptions still point to downward risks to the inflation projection for 2015. These assessments reflect the April revisions to the world oil price, which envisage sharper decline in the oil price in 2015 compared with the projection of October 2014. However, one should bear in mind that there is great uncertainty about the future movements in world oil prices and the possibility of sudden changes in this category. Also, in the meantime, upward risk factors appeared, i.e. adverse weather conditions in the domestic economy, but for the time being it is difficult to assess their effect accurately.
The latest data on foreign reserves show a significant decline since the beginning of the year, due to the early repayment of the loan from the IMF, used within the Precautionary Credit Line. If this effect is excluded, foreign reserves register a slight decline, which is in line with the October projection, and foreign reserves adequacy indicators further point to a sufficient level of foreign reserves to cope with possible, unforeseen shocks. Regarding the credit market, the preliminary data for March point to a relatively high credit growth on a monthly basis, following the relatively weak performance from the beginning of 2015. The monthly loan increase is equally distributed among households and the corporate sector. The annual growth rate of total loans in March was 9.2%, which is above the projection for the first quarter of 2015. Regarding the deposit potential, in March total deposits registered a monthly decline, due to lower deposits of enterprises and other financial institutions, amid retained growth dynamics of household deposits. Despite these achievements, their annual growth dynamics in March was above that expected for the first quarter as part of the October projection, due to the fast growth in deposits at the end of 2014.
In March, banks' liquidity declined under the influence of autonomous factors, which caused lower banks' placements of short-term excess liquidity in standing deposits with the NBRM. However, amid still high liquidity at the level of the banking system and reduced interest rates on standing deposits with the NBRM, on the money market, the downward trend in interest rates continued in March, and transactions in securities were predominantly traded. The movements on the foreign exchange market were stable in March, continuing the favorable trends from the beginning of the year, evident from the banks' increased purchase of foreign currency from their customers compared to the same period last year. Against such background, in the first quarter NBRM made net purchase of foreign currency from the market makers, and the exchange rate remained stable.
As for the euro area, the onset of the program for quantitative easing in March and the application of long-term refinancing operations by the European Central Bank, caused a significant increase of liquidity in the system. It contributed to the further depreciation of the euro, while influencing the improvement of the economic indicators and credit activity in the euro area. In the USA, despite the favorable developments in the labor market, there are certain signs of more moderate economic growth in early 2015, but it is estimated that the US economy is recovering on solid foundations.
Generally, the latest NBRM's assessments do not point to major changes in the environment for conducting the monetary policy. Foreign reserves adequacy indicators are expected to remain in the safe zone. Economic growth is solid and there are no price pressures. Movements in the credit market have been generally favorable for a longer period of time, despite their variability in individual months, suggesting relatively efficient transmission of the monetary measures undertaken so far on the credit activity and more stable expectations of domestic banks.
As before, the NBRM will continue to closely monitor the future macroeconomic developments, the risks related to the baseline macroeconomic scenario, the achievement of the projected path of foreign reserves and the developments in the foreign exchange market and will adjust the monetary policy accordingly.
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