On 10 September 2019, the National Bank’s Operational Monetary Policy Committee discussed the key domestic economy indicators and the developments on both, international and domestic financial markets, in the context of the monetary policy setup.
The Committee found that the monetary setup was appropriate to the current economic and financial conditions and that the economic fundamentals remained sound, with no imbalances in the economy. The absence of imbalance is evident through the low and stable inflation and favorable position of the balance of payments, a context which contributes to constant interventions for purchasing foreign currency by the National Bank at the beginning of the year. The dynamics and currency structure of household savings show stable expectations. In such circumstances, the Committee decided to keep the CB bills’ interest rate at 2.25% and at the CB bills auction on 11 September 2019, to offer CB bills in the amount of Denar 25,000 million, the same amount as the one that falls due.
Regarding the latest macroeconomic indicators, according to the published estimated GDP data, the economic activity continued to grow in the second quarter of 2019, with real annual growth rate of 3.1% (4.1% in the first quarter). Growth is driven by domestic demand, amid further growth in private and public consumption and gross investment, while net exports have negative contribution. In the first half of the year, GDP growth amounted to 3.6% and it was slightly more moderate than expected for this period of the year. High-frequency economic activity indicators in July point to further growth, however the number of indicators available so far is limited to derive more reliable conclusions about growth in the third quarter. According to the April projection cycle, it is expected that the economic growth in 2019 will reach 3.5%.
The average annual inflation rate for the first eight months of the year amounted to 1.1%, with the price growth being lower than expected. At the same time, expectations for the foreign prices fluctuation, which affect the domestic prices, are revised downwards. As a result, the risks to the inflation forecast for 2019 of 1.5%, for now, have been assessed as primarily downwards.
As for the external sector indicators, the performances in the balance of payments in the second quarter point to lower current account deficit, as well as higher net inflows in the financial account than projected for the second quarter. The currency exchange data, as of the first 10-day period of August, indicate possibility for higher net inflows from private transfers relative to the projections for the third quarter. At the end of August, the foreign reserves were higher compared to the end of 2018, with all adequacy ratios being in the safe zone.
In terms of movements in total deposits and total loans, preliminary data for August show further annual growth, with no major deviations from the expectations so far.
During the period between the two sessions of the Committee, banks' liquidity continued to increase, mainly reflecting the National Bank's interventions to purchase foreign currency on the foreign exchange market. Namely, in August, the National Bank purchased about Euro 88 million, when the banks registered net purchase of foreign currency from their clients for the second consecutive month. The further seasonal higher foreign currency supply by the currency exchange offices, as well as the moderate decrease in the net demand for foreign currency liquidity by the corporate sector, contributed the most to such movements. In addition to these developments, the active approach for managing foreign assets by the banks contributed to the high monthly amount of National Bank interventions, given the negative returns on the international financial markets. The favorable developments on the foreign exchange market continued also in the first week of September.
In conditions of further increase in denar liquidity, the banks had moderate need to borrow on the interbank deposit market. The banks directed the excess free denar funds to deposit facilities with the National Bank, which provide high flexibility and access to funds for smooth domestic lending.
During August, trade relations between the United States and China deteriorated through mutual imposition of new tariffs, which led to increased volatility in the financial markets. There was a growing demand for secure financial instruments, which led to higher prices and lower yields on government debt securities globally, as well as rising gold prices and appreciation of the US dollar on a monthly basis. Concerning monetary policy, the ECB and the Federal Reserves meetings raised concerns about future economic activity and price movements due to the adverse impact of trade tensions and other geopolitical risk factors.
Generally, the Committee concluded that the latest macroeconomic indicators and assessments indicate certain deviations in terms of the forecasted dynamics, but the perceptions for the monetary policy environment remained mainly unchanged compared to the previous assessment. The unfavorable external environment risks were once again emphasized, which are more pronounced in comparison with the preparation period of the April projections. In the period head, the National Bank will carefully monitor the trends and potential risks in the context of the monetary policy setup.
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