On 8 March 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 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 of Denar 25,500 million, at an unchanged interest rate of 3.25%.The latest indicators suggest that the domestic economy continues to grow at a solid pace, supported in part by the lending activity of domestic banks. Economic recovery takes place in the absence of price pressures or pressures in the external sector. Foreign reserves are still at an appropriate level, sufficient to cope with any unforeseen shocks in the future. The effects of the domestic political developments are assessed to be limited. Yet, uncertainty can still be observed in the surrounding, thus 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 political context and its 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 reveal major changes in the monetary policy setup. The real sector continues registering favorable trends. High frequency indicators suggest a continuation of favorable developments in the first quarter of 2016. After GDP growth of 3.5% in the third quarter, the latest available indicators suggest likelihood of maintaining steady pace of growth in the fourth quarter, given the favorable movements registered in the main economic sectors. The movements of the indicators of economic activity thus far suggest likelihood of a moderately higher than expected growth in 2015. Yet, notwithstanding these favorable trends, the uncertain global recovery, particularly unfavorable trends in the global metal market and the uncertainty arising from the domestic political upheavals remain to be the risks that may influence the pace of future recovery. In terms of inflation, in the first two months of 2016, the general level of prices in the domestic economy registered a moderate increase of 0.1% annually, on average. The performance was lower than expected and along with the downward revisions of the assumptions underlying import prices of energy and food, continued to point to downward risks to the inflation projection for the next year. However, one should bear in mind the great uncertainty clouding the future movements in world oil prices and the possibility of sudden changes in this category. Recent foreign reserves data (adjusted for the effects of price and exchange rate differences and price changes of securities) as of February show that they have been moderately decreasing since the beginning of 2016. The changes in foreign reserves at the beginning of the year are as projected in October, and the foreign reserves adequacy ratios remain within a safe zone. The foreign exchange market registered usual seasonal patterns, whereby the net demand for foreign currency for the needs of economic entities remained at the level of the previous month. Amid still low foreign exchange liquidity of the banking system due to outflows based on repayment of foreign liabilities in the previous month, February was also marked by a growing demand for foreign currency on the interbank foreign exchange market, thus maintaining the exchange rate relatively high. In such circumstances, the National Bank intervened by selling foreign currency in the middle of the month. In the last week of February, the inflows of foreign assets in the banking system brought about moderate stabilization of the movements on the foreign exchange market and downward movement of the exchange rate. Analyzing external sector indicators available thus far, the trade deficit data are better than expected, while indirect indicators of private transfers show no deviation from the projections. However, the period to which data refer is very short to draw more reliable conclusions. Regarding the credit market, the preliminary data for February point to a monthly increment in the loans to the private sector, following the decrease registered in January 2016. The monthly growth in loans is primarily driven by the increased corporate lending, although moderate growth was also registered in the household loans. The annual growth rate of total loans in February was 9%, which is above the projection for the first quarter of 2016. Regarding the deposit potential, total deposits increased in February after the decline in January, whereby their annual growth dynamics in February was also beyond the expectations for the first quarter, as part of the October projection. In February, liquidity of banks grew under the influence of autonomous factors, and banks invested excess liquidity in the deposit facility with the National Bank. Furthermore, the improved liquidity in February decreased the trade activity on the interbank money market - both the segment of unsecured deposits and the secondary securities market.
In February, the international financial markets expressed concerns about the global economic growth and the situation of the financial institutions. Against such backdrop, investors increased the demand for safe financial instruments, bringing stock prices down, increasing the prices of government securities and rising the gold prices. Moreover, the agreement of oil producing countries to limit monthly production to the level from the beginning of the year ensures stabilization and moderate gradual increase in oil prices.Overall, recent developments suggest similar macroeconomic landscape as projected in October, with solid economic and credit growth, absence of price pressures and balance of payment position that ensures maintenance of foreign reserves at an adequate level. The fundamentals of the economy remain solid. Risks have arisen from both the external and the uncertain domestic surrounding. Exogenous factors remain associated with the possible changes in the pace of recovery of the global economic growth, as well as with the movements in the prices of primary products in world markets. Despite the relatively small and limited impact of domestic risks thus far, any continuation of uncertainty related to political developments brings about possibility to spill over into the economy due to the greater restraint of both domestic and foreign investors. However, some risks have been mitigated by the NBRM measures in the reserve requirement instrument, aimed to further support long-term savings in domestic currency, and therewith to support the process of denarization of the economy. The purpose of the December set of measures aimed to slow down the rapid growth of long-term consumer loans was the same, and also facilitate the conditions for funding of the corporate sector, including SMEs. The non-standard measure in reserve requirements for systemically important sectors of the domestic economy aims to further support lending to net exporters and domestic producers of electricity. The NBRM will continue to closely monitor the developments in the period ahead, and if appropriate, will accommodate the monetary policy for successful achievement of the monetary policy objectives.
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