On 13 August 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.
According to the Committee’s assessments, the monetary setup is adequate to the current economic and financial conditions, and it was decided to maintain the CB bill interest rate at 2.25%. At the meeting, it was also decided to offer the same amount of CB bills i.e. Denar 25,000 million at the auction that will be held on 14 August 2019.
The latest domestic economy developments in the context of the latest macroeconomic forecasts were also discussed at the meeting. According to the Committee, the economic fundamentals remain sound, without any economic imbalances. The lack of imbalances is evident through low and stable inflation and favorable balance of payments position, a context which contributes to the continuous interventions for purchasing foreign currency by the National Bank since the beginning of the year. The dynamics and currency structure of household savings point to stable expectations.
Regarding the latest macroeconomic indicators, currently available high-frequency data for the second quarter of 2019 mainly point to further economy growth, but probably more moderate compared to the first quarter.
The average annual inflation for the first seven months of this year was 1.2%, with expectations for an inflation rate of 1.5% for the entire 2019. Risks regarding the inflation forecast for 2019 so far have been assessed as balanced.
Regarding the external sector indicators, foreign trade performances as of the second quarter of this year show a possibility of achieving a slightly lower than expected trade deficit for the second quarter. Data on foreign exchange market as of the second decade of July are currently in line with the forecasted and point to the possibility of net inflows from private transfers on the expected level for the third quarter. At the end of July, the foreign reserves were higher compared to the end of 2018, with all adequacy ratios being in the safe zone.
Regarding the developments in total deposits and total loans, the initial data for July show further growth on an annual basis, which is more moderate in loans.
In the period between the two Committee meetings, the bank liquidity remained stable and high, as a result to which banks had a low need for borrowing on the interbank deposit market. In terms of liquidity flows in the banking system, the seasonally higher demand for Denar cash from households was entirely compensated by issues of Denar assets by the National Bank, performed through interventions for purchasing foreign currency in the foreign exchange market. In July specifically, the National Bank purchased Euro 43.8 million. The high monthly amount based on the interventions was achieved amid increased purchase of foreign currency of the banks in transactions with exchange offices, which is a usual seasonal development, and was higher in July this year compared to the same month of the previous year. Banks used the foreign exchange liquidity to meet the demand on both the domestic and international foreign exchange market, and the excess foreign currency was purchased by the National Bank. The purchase in the foreign exchange market also continued at the beginning of August, whereby cumulatively from the beginning of the year, as of 13 August, the National Bank purchased Euro 174.55 million.
Banks continued to direct excess available funds to deposit facilities with the National Bank, which provided high flexibility and access to funds for smooth domestic lending.
Downward risks to the economy also prevailed in July, thus directing the global central bank policies towards supporting the economy growth. The financial markets in the euro area registered a decline in the safe instrument yields, amid increased demand from investors, due to the efforts for achieving greater yields and expectations for ECB policy relaxation. At the regular meeting, ECB signalized that it was prepared to undertake activities for additional monetary support. FED, as expected, reduced the target level of movements of the reference interest rate by 0.25 percentage points, spanning from 2% to 2.25%. Such decision was presented as a monetary policy adjustment to the current cycle, stressing that this was not the beginning of an intensive expansionary monetary policy cycle. At the beginning of August, the volatility on the international financial markets increased further, as the trade relations between USA and China escalated. USA announced that it will impose duties on imports of products from China, that have not previously been subject to them, since the expected progress from the discussions between both countries was not achieved.
Overall, in the meeting, the Committee concluded that the latest macroeconomic indicators and assessments indicate certain deviations in terms of the forecasted dynamics, while the perceptions for the monetary policy environment are mainly unchanged compared to the previous assessment. Thus, the Committee again underlined the unfavorable risks arising from the external environment. 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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