On 9 October 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 the context of the monetary policy setup.
The Committee assessed that the monetary setup is adequate to the current economic and financial conditions, and decided to keep the interest rate on the CB bills at the level of 2.75%. At the meeting, the Committee also decided to keep the supply of CB bills, for the auction to be held on 10 October 2018, at the level of Denar 25,000 million. Generally, at this meeting, the Committee maintained the current perceptions for sound economic fundamentals and stable expectations of the economic agents, evident through the favorable developments on the foreign exchange market and the increase in the banks’ deposit base. The risks to the economy coming from the domestic, but also from the external environment are still present.
Comparison between the latest macroeconomic indicators of the domestic economy and their dynamics forecast in April indicates deviations in some economic segments. According to the published estimated data, GDP growth for the first half of the year is weaker than expected, mainly due to the temporary cessation of some of the larger projects within public infrastructure investments. For the third quarter, given a limited scope of available data, the situation in the economy cannot be assessed precisely, although most of the high-frequency data point to continuation of the favorable movements in the economy in this quarter of the year.
Regarding the inflationary movements, in the period January - September, the average annual growth rate of the consumer prices was 1.5%, which is a downward deviation from the April forecast. In conditions of poorer performance, but also an upward revision of external input assumptions in the inflation forecast, it is estimated that the risks related to the forecasted inflation rate for 2018 are balanced.
The latest foreign reserves data show an increase compared to the end of the previous year, largely due to the NBRM’s net purchase of foreign currency. Growth in the foreign reserves is slightly faster than expected with the April forecast, and the analysis of foreign reserves adequacy indicators shows that they remain in the safe zone. The available external sector indicators for the third quarter of the year are currently limited. The foreign trade data for the period January - August indicate a slightly higher trade deficit compared to the April forecast, while the available currency exchange market data show higher net purchase. Regarding the total balance of payments, the data for the first half of the year indicate improved performance in both current and financial transactions compared to the April forecast.
Initial monetary data for September 2018 show further growth of loans, given the monthly decrease of deposit base. Namely, in September, deposits registered a slight decline, which resulted from the reduction in corporate deposits, while household savings continued to increase. On the credit market, in September, there are positive trends in corporate lending, which, after the reduction in the previous two months, increased in September, and made the largest contribution to the growth of total loans. At the same time, the trend of increasing credit support to the households continued. During the third quarter, deposit and credit flows are higher than expected for this period, whereby the level of both deposits and loans in September exceeds the forecast.
In the period between the two monthly meetings of the Committee, banks' denar liquid assets reduced, due to government transactions which was partially offset by the seasonally lower demand for denar cash.
During September and the first days of October, the National Bank intervened in the foreign exchange market with purchase of the excess foreign currency, contributing to a moderate increase in the banks’ denar liquidity. Since the beginning of the year until now, the total purchase of foreign currency by the National Bank amounts to about Euro 250 million. The interventions reflect the favorable foreign exchange market developments in transactions of banks with the corporate sector, but also the higher net purchase on the currency exchange market, and amid simultaneously solid foreign currency liquidity of the banking system.
The high denar liquidity position in most of the banks contributed to a reduced trading volume on the money markets also in September, and banks placed most of the excess denar assets in overnight deposit facility with the National Bank.
In September, there was an increase in yields on government bonds on both sides of the Atlantic, influenced by the gradual return of the propensity to take risks and the confirmation of a gradual decline in the monetary stimulus in the euro area. Namely, at the last meeting of the ECB it was confirmed that, starting from October, the monthly purchase of securities within the quantitative easing program will be reduced, and the President Draghi indicated expectations for further convergence of inflation towards the target inflation, which creates space for the beginning of normalization of the policy during the next year. The Federal Reserve System - FED continued with the normalization of the monetary policy, so for the third time in 2018, it increased the target level for the interest rate spread by 25 basis points to the level of 2-2.25%. Despite such stabilization, during the month, on the markets, there was certain uncertainty and increased interest of market participants in investments in safe financial instruments. This uncertainty was a reaction to the risks surrounding Italy's fiscal position. The further intensified trade tensions between the United States and China, after coming into effect of the additional customs duties imposed by the United States on the import of Chinese products to the value of US Dollar 200 billion, caused additional market uncertainty.
In general, at the meeting it was concluded that since the reduction of the interest rate in August until now, no major changes in the trends of key monetary policy indicators were noticed. The latest macroeconomic indicators and assessments of certain segments suggest certain deviations from the forecast dynamics, which for now have not caused major changes in the perceptions for the monetary policy environment. At the session it was concluded that risks from the domestic and the external environment are still present, whereby the National Bank will continue to closely monitor all economic and market indicators in the context of the monetary policy setup.
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