The NBRM's Operational Monetary Policy Committee held its regular meeting
On 13 March 2018, 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 light of the monetary policy setup.
The Committee reviewed the latest developments in the domestic economy, concluding that the economic fundamentals are sound, without any imbalances. Furthermore, it also ascertained that the confidence and expectations of the economic agents has further stabilized, as seen through the favorable movements on the foreign exchange market and the gradual acceleration of deposit growth. At the same time, the latest growth assessments of the major trading partners point to a better external surrounding than expected and thus a better environment and lower risks to the domestic economy. In such circumstances, the Committee assessed that there was room for easing of the monetary policy and decided to reduce the CB bill interest rate from 3.25% to 3.00%, and to offer the same amount of CB bills at the auction on 14 March (Denar 25 billion).
Furthermore, the Committee decided to reduce the interest rates on 7-day and overnight deposit facilities by 0.20 and 0.10 percentage points, respectively (to 0.3% and 0.15%, respectively). Namely, considering the relatively high level of banks’ available funds directed primarily towards deposit facilities with the National Bank, the cut of their interest rates is expected to make banks to direct their available liquid assets to the private sector, and thus to provide stronger credit support to the economy in 2018.
The comparison of the latest macroeconomic indicators for the domestic economy with their forecasted dynamics within the October forecast vintage last year does not indicate major deviations in the individual segments.
Observing the economic activity, GDP data for 2017 show stagnation, mainly due to the decline in investments, and these performances do not deviate considerably from the forecast growth of 0.5%. After the fall in the first half of the year, as expected, in the second half of the year, the economy registered a growth. A few high frequency data have been available for the first quarter of 2018, with the industry and trade data indicating improvement. Surveys indicate further increase in the confidence of economic entities, but with certain slowdown in the growth.
The available inflation data for February 2018 have shown an average annual increase in the price level of 1.5% in the first two months of the year, given the growth of all components, with the largest contribution of the core inflation. Inflation in this period has been slightly lower than forecast, but the expectations for some of the import prices have been corrected upward. In such circumstances, risks surrounding the inflation forecast of 2% for 2018 have been assessed as balanced.
In the period between the two monthly meetings of the Committee, the liquidity potential of the banks has been increasing, mainly due to the realization of the regular budget expenditures intended for subsidizing agricultural production. Amid relatively weak credit activity during the month and further liquidity growth, banks continue to direct the excess available funds to deposit facilities with the National Bank, whose balance at the beginning of March exceeded Denar 15 billion. At the same time, there was reduced demand on the money markets, while interest rates have still been stable and unchanged.
Foreign reserves data in February indicate an increase since the beginning of the year, which was mostly due to transactions on behalf of the government as a result of the issuance of the sixth Eurobond on the international financial markets.
Foreign exchange market is stable, without pressures on the demand for foreign currency. The foreign reserves movements are mainly as expected, and the foreign reserves adequacy ratios remain within the safe zone. Of the external sector indicators, trade data are available for the beginning of 2018, pointing to the possibility of a slightly larger trade deficit than forecasted.
In brief, compared to the same period last year, relatively favorable movements marked by a moderately lower net sale of foreign currency by the banks for their clients have been registered in the foreign exchange market. In February, the supply of and demand for foreign currency by the clients was balanced, which allowed stabilization of the banks' foreign currency liquidity and absence of interventions of the National Bank on the foreign exchange market. Relatively favorable movements on the foreign exchange market mostly reflected the improved performances in the transactions with companies that registered a significant increase in the supply for the second month in a row, with increased supply also being registered in the transactions with exchange offices.
Currency exchange market data as of the second 10-day period of February point to net inflows from private transfers as forecast for the first quarter of 2018. However, the assessment period is too short to draw any reliable conclusion.
Balance of payments data for 2017 confirmed the observations of a moderate current account deficit (1.3% of GDP), which is lower than the forecast, with better than expected financial flows for 2017.
In terms of monetary movements, preliminary data for February show a recovery in the deposit base after its decline in January. The deposit growth this month has largely reflected the higher household saving, with growth also registered in corporate deposits. The banks' deposit performances in this period point to the possibility for a level higher than forecasted for the first quarter of 2018.
Credit market also registered positive movements on a monthly basis in February, given the higher lending to households. No larger deviation of the credit aggregates from the forecast for the first quarter of 2018 has been expected thus far. According to the results of the Lending Survey, the banks expect further easing of the total credit standards and growth in the demand for loans to both sectors for the first quarter of the year.
At the beginning of February, amid stronger expectations for inflationary pressures in the US economy, there was a significant downward correction of stock prices on the capital market. However, by the end of the month, amid increased propensity for risk taking, the share prices increased, thus stabilizing the price movements on the capital market. The US dollar appreciated on a monthly basis, partly associated with the testimony of the new Federal Reserve Chairman Jerome Powell, who pointed out that the US economy has solid performances that create conditions for a stronger monetary response by raising interest rates in the upcoming period. Also, the monthly depreciation of the euro was also due to the uncertainty about the outcome of the Italian parliamentary elections and the political developments in Germany. In early March, there has been an increased volatility on the global foreign exchange markets under the influence of increased risks for global trade given the protectionist measures introduced in the United States.
In summary, in the meeting, the Committee concluded that the current economic and financial conditions as well as the existing risks suggest that there is room for easing of the monetary policy. The external position, as assessed by the current account performances, is favorable and higher than expected and shows maintenance of sound economic fundamentals. In addition, some indicators point to further improvement of the expectations and the confidence of the economic agents.
In the period head, the National Bank will carefully monitor all economic indicators and developments in the domestic economy in the context of the monetary policy setup, creating conditions for further strengthening of the support of the banking sector for the economic activity in the country without jeopardizing the achievement of its main objective.
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