On 12 February 2019, the National Bank’s Operational Monetary Policy Committee held its regular meeting and discussed the key domestic economy indicators and the developments on the international and domestic financial markets in the context of the monetary policy setup.
After the interest rate cut in December last year, at this meeting the Committee assessed that the monetary setup is adequate to the current economic and financial conditions, and decided to keep the interest rate on CB bills at the level of 2.5%. At the meeting, the Committee also decided to keep the supply of CB bills, for the auction to be held on 13 February 2019, at the level of Denar 25,000 million. In general, at this session, the Committee retained the previous observations on sound economic bases and stable expectations of economic agents, evident through the favorable developments on the foreign exchange market and the growth of the deposit base of banks.
The comparison of the latest macroeconomic indicators with their forecasted dynamics within the last year's October forecasting round does not indicate significant deviations in the individual segments of the economy. Data on economic activity for the third quarter of 2018 showed GDP growth of 3%, which is somewhat better than expected. The currently available high-frequency data for the period October - December 2018 suggest more favorable developments in the economy in the fourth quarter, amid rapid growth in industrial activity and the trade turnover, as well as a high growth in completed construction works, as opposed to their fall in the third quarter of the previous year. Given this, the data indicate further recovery of the economy.
Regarding the inflationary movements, the realized annual inflation rate of 1.5% for 2018 corresponds with the October projection, while the estimations for the movement of most of the import prices in the coming period have changed downwards. However, in such circumstances, risks regarding the inflation forecast of 2% for 2019 for now are assessed as balanced.
The latest data on the foreign reserves showed their further rise, given favorable developments on the foreign exchange market and interventions with net purchase of foreign currency by the National Bank. The growth of foreign reserves in January 2019 for now is somewhat more moderate relative to the projected growth for the first quarter, and the analyses of adequacy indicators show that the foreign reserves are still maintained in the safe zone. According to the current available external sector indicators, the foreign trade data for the period October - December 2018 indicate a possibility for realization of improved trade balance than expected.
In terms of monetary movements, the preliminary monetary data for January 2019 show a monthly decrease in both deposits and loans, which is a usual move for this month of the quarter and for the time being, does not indicate a significant deviation of the movements of these aggregates from the projections. On an annual basis, the growth of deposits in January exceeded the annual growth forecasted for the end of the first quarter of the year, while for the time being the annual growth of lending is slightly lower than forecasted.
In the period between the two meetings of the Committee, domestic banks had relatively low trading activity on the money markets, given further increase in the denar liquidity position of the banking system. The growth of banks' liquid assets in this period for the most part reflects the seasonally lower demand for denar cash by legal entities and natural persons after the New Year and Christmas holidays.
On the foreign exchange market, amid the seasonally high foreign exchange offer from the exchange offices in December last year, the banks directed the part of the surplus foreign currency liquid assets to the National Bank, which intervened with a moderate purchase of Euro 2 million at the beginning of January this year. By the end of last month, given the higher monthly decline in the supply of foreign currency in the exchange offices and the decline in the demand for foreign currency in the corporate sector, the banks realized net sale of foreign currency for their clients, as opposed to the net purchase in December, which is usual for this month of the year. The banks compensated net demand for foreign currency from own sources, as well as through trading on the interbank foreign exchange market.
During January and the first week of February, the banks have neutralized the short-term changes in denar liquidity by adjusting placements in overnight deposit facilities with the National Bank, that allow high flexibility and ensure availability of funds.
At the beginning of this year, economic data and indicators for future expected movements point to further slowdown in the growth of the eurozone economy. Moreover, in conditions of pronounced uncertainty, and according to and downwardly revised IMF and World Bank projections, the globally influential central banks moved towards a more careful approach in assessing the need to tighten monetary policies. Thus, at the January meeting, the European Central Bank (ECB) pointed to the downward risks that affect lower economic growth. At the January meeting, the Federal Reserve (FED) stopped the interest rates growth cycle and emphasized that in the coming period they will have a more cautious approach when making decisions for further increase of interest rates, as well as with regard to liquidity withdrawal, through reduction of the securities of the value in the balance sheet of the central bank.
In summary, at the meeting it was concluded that since the reduction of the policy rate by the National Bank in December last year, no major changes in the trends of key monetary policy indicators were noticed. The latest macroeconomic indicators and assessments do not suggest significant deviations from the forecast dynamics, nor changes in the perceptions for the monetary policy environment. At the meeting it was concluded that the risks arising from the environment are still present. Consequently, the National Bank will continue to closely monitor the developments in the economy, as well as the potential risks, in the context of the monetary policy setup.
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