On 8 August 2016, the NBRM's Operational Monetary Policy Committee held its regular meeting
On 8 August 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.
At the meeting the adequate monetary policy setup was assessed and the Operational Monetary Policy Committee decided the CB bills offered at the auction to be in the amount of Denar 22,000 million, at an unchanged interest rate of 4%.
In recent period, there were signs of stabilization in the expectations, evident through the absence of pressures on the foreign exchange market and NBRM interventions with purchase of foreign currency, as well as growth in household savings in the banking system, with the latest data showing an increase in the propensity to save in domestic currency. It is estimated that the soundness of the economic fundamentals remains positive.
Available high frequency data on economic activity for the second quarter of the year suggest a continuation of economic growth, but at a slower pace compared to the first quarter. The performances in the economy since the beginning of the year so far were weaker than expectations, which together with the risks from the external environment and domestic political developments point to downward risks to the GDP projection for 2016. In terms of inflation, the average annual change in domestic consumer prices remained in the negative zone, amid lower food and energy prices. On the other hand, core inflation registered positive annual growth rates. Inflation performances so far indicate lower inflation than projected, and the risks to the projection by the end of the year remain associated with the variability of expectations about the changes in world prices of energy and food.
In July, on the foreign exchange market, given the seasonal increase in supply of foreign currency from moneychangers and simultaneous decline in demand for foreign currency from the companies, banks realized purchase of foreign currency in transactions with clients on a net basis. In transactions with natural persons, further reduction in demand for and simultaneous increase in supply of foreign currency, which led banks to register relatively high net purchase, was registered. Favorable movements in transactions with clients contributed to the improvement of banks' foreign currency liquidity, leading to increased supply of foreign currency on the interbank foreign exchange market. In such circumstances, from 25 July, the National Bank intervened daily with purchase of foreign currency from market makers, whereby as of 8 August, a total of Euro 48.3 million were purchased. The NBRM interventions on the foreign exchange market contributed to the improvement of Denar liquidity of the banking system. In such circumstances and in order to effectively manage liquidity, banks have increased their investments in the deposit facility with the National Bank.
The latest data on the foreign reserves for July show a high growth of foreign reserves, whereby the transactions on behalf of the government were the main factor for the growth in this period, due to the issued Eurobond, and to a lesser extent foreign currency deposits of domestic banks with the NBRM, as well as the NBRM interventions on the foreign exchange market, which during July were aimed at net purchase of foreign currency. All foreign reserves adequacy indicators show that they continually hover in a safe zone. Regarding the external sector indicators, so far the available data show a current account deficit, slightly higher than expected and financial flows in line with expectations. It is important to emphasize that the currency exchange market developments, as an indicator of private transfers, are favorable, amid growth of net purchase of foreign currency during June and July. Also, recent performances in direct investment are solid and better than expected.
Signals for visible stabilization in the expectations of economic agents were also seen through changes in the banks' deposit base. The June deposit data showed a significant slowdown of the decline in the total deposit potential, amid simultaneous slight increase in household savings. Preliminary data for July indicate a higher level of total deposit base compared with the previous month, entirely as a result of the solid growth in household deposits. Moreover, in this month, there is a higher propensity of households to save in denars, contrary to the holding of foreign currency. Such behavior shows a significant improvement of the perceptions of entities, and may in part be a response to shifts in the banks' interest rate policy. Namely, in June for the first time after a longer period of time, there was a widening of the spread between the interest on Denar household deposits and foreign currency deposits, which is consistent with the monetary measures taken so far. With regard to projections, the level of deposits in July was lower than projected.
In terms of the credit market, preliminary data for July show a slight decline in new credit flows, amid a decline in loans to the corporate sector and a further increase in household lending. This adjustment in lending was followed by the solid growth in total loans to the private sector in June (excluding the effect of regulatory changes) and is not unusual for this period of year. The results of the latest Lending Survey for the second quarter point to a further easing of overall credit terms in both sectors, amid moderate net reduction in demand for corporate and housing loans. 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.
On the international financial markets, after the initial reaction of the decision for exit of the United Kingdom from the EU, developments gradually stabilized. Business expectations indicators suggest limited effects in the short run from Brexit on economic activity in the euro area, which in the second quarter moderately slowed down compared to the previous quarter. The published stress tests of the European banking system showed solid capitalization of banks, which creates room for further credit support to the private sector in the next period. In the US, the positive labor market developments continued in July, but the US economy recorded weaker growth compared to expectations for the second quarter, which conditioned reduced market expectations for rise in interest rates by the end of the year.
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.
 Transfer of part of doubtful and contested claims of banks in the off-balance sheet record, according to the decision of the NBRM from December 2015.
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