On 14 July 2015, the NBRM's Operational Monetary Policy Committee held its regular meeting
On 14 July 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 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. Performances in the external sector continue to provide maintenance of foreign reserves at an appropriate level, sufficient to cope with possible unforeseen shocks in the future. The risks in this period are related to non-economic factors associated with domestic political developments and escalating economic and political developments in Greece (especially in June), the effects of which are now estimated as very limited, mainly materialized through the expectations channel. Against such background, leaving the zone of accommodative monetary policy in the next period 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. According to published data on GDP, the growth of economic activity in the first quarter of 2015 is within the expectations and the indicative high frequency data for the second quarter point to continuation of the growth of the domestic economy. Exception is the industrial production which in the April-May period registered an average decline of 3% annually. Inflation registered in June points to maintenance of the positive annual growth rate for the third consecutive month, thus reducing the risks of a prolonged price decline. On average, in the first six months of the year, the general price level in the domestic economy shrank by 0.3% on an annual basis. The average annual decline in the inflation in 2015 is a result of lower prices in the energy component of inflation, while food prices and core inflation recorded a slight growth on an annual basis. So far, inflation is estimated to be within the projection. Recent assessments of external assumptions compared to the April projections indicate the possibility of a smaller decline in the world price of oil, while the latest assessments for world food prices point to possible stronger import pressures through this channel on domestic inflation, compared to the April 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, during the second quarter of 2015, foreign reserves registered a decline, which was greater than expected in the April projections. The NBRM intervened in the foreign exchange market with a net sale of foreign currency, which was in part expected, considering the payment of dividends to foreign shareholders, typical for this time of the year. The available external sector indicators for the second quarter are still insufficient to create an accurate picture of the position of the balance of payments compared with the projection. Data on foreign trade as of May point to achieving trade deficit in line with that projected for the second quarter of the year. At the same time, the net purchase from currency exchange operations as of the second ten-day period of June signals somewhat lower private transfers than expected for the second quarter according to the April projection. The analysis of foreign reserves adequacy indicators shows that they continue to move within a safe zone.
Liquidity of domestic banks under the influence of autonomous factors registered a moderate growth in June, versus the previous three months when the autonomous factors acted toward reduction of liquidity in the banking system. In such circumstances, banks increased the amount of short-term surpluses invested in deposits with the National Bank. On the money markets, the upward trend in the volume of trade continued on both the interbank deposits market and on the secondary securities market, with the realized interest rates remaining relatively stable.
Movements in the foreign exchange market in June were influenced by the common seasonal developments, characterized by higher demand for foreign currency by the private sector, for payment of dividends to foreign investors. Additionally, other economic entities also registered a moderately increased demand for foreign currency, associated with the increased uncertainty created by domestic political developments and negotiations of Greece with the international lenders. The higher need for foreign currency was satisfied from banks' own funds, and also from the interventions of the National Bank, which sold foreign currency to the market makers. However, the performances on the foreign exchange market in the first half of the year improved on an annual basis, mainly due to better performances on the foreign exchange market of banks with companies, amid higher supply of foreign currency on the basis of exports of the new facilities from the free economic zones, foreign exchange inflows associated with the realization of capital infrastructure projects and reduced demand for foreign currency amid lower oil prices and lower import of electricity.
Initial credit market data for June show further solid monthly growth of total loans to the private sector and accordingly, maintenance of favorable trends in this segment. The annual growth rate of total loans in June was 9.1%, which is above the projection for the second quarter of 8.8%. Regarding the deposit potential, initial data as of June show growth of total deposits on a monthly basis, which is completely driven by the growth of deposits of the corporate sector. Household deposits register a monthly decline for the second month in a row (although in June it is smaller compared to May), due to the increased uncertainty arising from domestic political developments and the escalation of events related to the debt crisis in Greece (particularly pronounced in June). Total deposits as of June are lower than projected, so at the end of the second quarter total deposits increased by 8.8% on an annual basis, while the projection envisages growth of 10% annually.
Regarding the developments in the international financial markets, they were dominated by the events related to the developments in Greece, which were to some extent resolved at the beginning of July by reaching an agreement with the European partners for starting negotiations on a third program for financial assistance through the European Stabilization Mechanism. Thus, conditions have been created for further strengthening of the economic growth in the euro zone supported by the ECB's measures for encouraging the lending activity and stabilizing inflation expectations. Macroeconomic indicators for the USA are favorable, thus confirming the expectations of market participants that the first increase in interest rates by the Fed could happen in the second half of the year. However, certain risks are evident on the global markets, related primarily to the sharp decline in stock prices in China, with an uncertain impact on the future economic activity of this global trading partner. Additionally, several factors on both the supply and the demand side influenced the decrease in oil prices, which could have an effect on keeping global inflation low.
Generally, though in the period since last April projections, risks of domestic and foreign nature have increased, recent macroeconomic indicators and assessments currently do not point to significant changes in the environment for conducting 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. However, certain indicators suggest possible early effects of non-economic factors whose impact is mainly materialized through the expectations channel. Data on the deposit market show a certain restraint of the households in terms of saving in the banking sector particularly in domestic currency, which in addition to seasonal factors (common payment of dividends in this period) is another factor contributing to the decline in foreign reserves during this period. However, these changes occur in a relatively short period, during which unfavorable developments are very limited so far. Hence, it is very likely that these are temporary trends, which are expected to stabilize in the next period in parallel with the agreement to stabilize the domestic political environment, and the expectations for concluding a new comprehensive program of structural reforms and funding of Greece as the main factors of uncertainty in this period.
The NBRM will continue to monitor closely the future macroeconomic developments and the possible materialization of risks and will adjust the monetary policy accordingly.
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