On 12 March 2019, the National Bank’s Operational Monetary Policy Committee held a 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.
Based on the assessment of the existing economic and financial conditions, as well as the existing risks, the Committee assessed that there is room for further monetary policy easing. At the session, a decision was made to cut the policy rate by 0.25 percentage points, i.e. from 2.50% to 2.25%. The offer of CB bills on the auction to be held on 13 March is maintained at the level of Denar 25.000 million. The decision on reducing the interest rate is based on the maintained favorable movements on the foreign exchange market, which indicates absence of pressures in the external sector and stable perceptions of the domestic entities. At the same time, current movements show moderate growth in domestic prices, and thus absence of price pressures. The ECB's latest announcement for keeping the interest rates at the current level longer than previously anticipated makes additional room for monetary easing, as well as for further relaxation through other monetary instruments.
Regarding the latest macroeconomic indicators, the estimated official GDP data for the fourth quarter of last year show solid economic growth of 3.7% on an annual basis, which is higher than expected in October forecasts. From the aspect of the growth structure, the better performances are mainly explained by the higher growth of private and public consumption relative to forecasts. According to the expectations, gross investments also increased, although a little bit less than projected. Observed for the entire 2018, the real growth of the economy equals 2.7%, exceeding the expectations in October projections by 2.3%. For the first quarter of this year, in conditions of limited scope of available data, it is difficult to give more precise assessment of the economic situation. However, the available data point to the continuation of favorable movements in the economy, given faster growth of the activity in industry and further increase in the trade turnover.
Regarding the inflationary movements, in the first two months of the year, the average annual growth rate of the consumer prices equaled 1.1%, which is a lower performance compared to October forecast. The estimates for the movement of most of the import prices in the coming period have changed downwards. In such conditions, risks relating the projected inflation rate for 2019 of 2% are currently assessed as downward.
The available data on the foreign trade statistics for January point to a trade deficit that is generally in line with the expected for the first quarter of the year. Out of the other available indicators for the external sector, the data on the currency exchange market as of the second decade of February point to realized net inflows from private transfers, which are within the expectations for the first quarter of this year. The realized deficit on the balance of payments’ current account for 2018 is lower compared to the October projection, amounting to 0.3% of GDP, compared to the projected 0.5% of GDP. The position of the financial account significantly improved, with net inflows of 5.3% of GDP as opposed to the projected 4% of GDP, mainly as a reflection of the higher inflows on the basis of direct investments. At the end of February, the foreign reserves were somewhat lower compared to the end of last year, with their level remaining high and maintaining in the safe zone.
In terms of monetary movements, preliminary monetary data for February show monthly growth in both deposits and loans, with favorable movements in terms of currency and sector structure. Due to better performances at the end of 2018, the deposit growth, on an annual basis, continues to exceed the projected one for the end of the first quarter of this year. Regarding the lending activity, the weaker performances at the end of last year influence to maintain lending lower than expected, and thus its slightly lower annual growth compared to the projected one.
In the period between the two meetings of the Committee, the liquidity of the domestic banks continued to increase, given relatively lower activity on the interbank deposit market. The excess free funds was redirected to the deposit facilities with the National Bank, which provide high flexibility and availability of funds for smooth credit support to domestic entities.
On the foreign exchange market, on a net basis the banks purchased a moderate amount of foreign currency in the transactions with customers. Such market movements combined with the banks' investments in instruments with currency component influenced towards increase in their foreign exchange liquidity and interventions of the National Bank with moderate purchase of foreign currency from market makers on the foreign exchange market.
At the international financial markets, in February, the increased risk aversion dominated on both sides of the Atlantic, fueled by the optimism for resolving the trade dispute between the United States and China and the heightened expectations of postponing the UK exit date from the EU. In such conditions, yields on government bonds rose, while the global stock indexes continued to rise. However, these positive market movements ceased at the beginning of March. Namely, at the ECB meeting held on 7 March, it was emphasized that interest rates will remain unchanged by the end of the year. At the same time, a new series of refinancing operations - TLTRO III, was announced in conditions of perceived slower economic growth and low price pressures in the next two years. In such conditions, there was a downward correction in the yields of safe investment instruments, both in the euro area and in the United States, and at the same time, the euro significantly weakened.
In summary, at the meeting, it was concluded that according to the current economic and financial conditions, the perceptions for the monetary policy environment are somewhat more favorable than before, which suggests that there is room for further reduction of the policy rate. The economic growth in the last quarter, as well as for the whole of 2018, is higher than expected, in the absence of pressures on prices from domestic demand, evident through continuous low and stable inflation rate. Movements on the foreign exchange market continue to point to a favorable external position of the economy and confidence in the domestic currency. In addition to such perceptions is the more relaxing tone in the ECB rhetoric at the last meeting, i.e. announcements for a new series of refinancing operations and expectations to keep key interest rates at the current levels longer than previously expected.
Risks are still present, and the National Bank will continue to carefully monitor the trends and potential risks of the environment, in order to adequately adjust the monetary policy setup.
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