On 11 December 2018, the NBRM'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 2.75% to 2.50%. The offer of CB bills on the auction to be held on 12 December is maintained at the level of Denar 25.000 million.
The interest rate cut reflects the continuous favorable movements on the foreign exchange market, which indicate a solid external position and stable expectations of economic agents. Movements in the deposit base of banks are also favorable, which is also a signal for stable expectations and confidence. In general, at this session, the Committee retained the previous observations on sound economic bases and the absence of imbalances.
Regarding the latest macroeconomic indicators, the estimated GDP data for the third quarter of this year show solid economic growth of 3.0%, on an annual basis, slightly higher than expected in the October projections. From the aspect of the growth structure, in the third quarter, the favorable performances on the export side are the main factor for the high positive contribution of net exports to the total economic growth. Domestic demand, driven by the growth in private and public consumption, has positive contribution, despite the continued fall in gross investments. For the last quarter of 2018, having in mind the limited range of available high frequency indicators of economic activity, it is difficult to give a clear picture of the movements in this period. However, some of the available indicators, in particular from industry and trade, point to further economic growth.
From the aspect of the inflationary movements, in the period January - November, the average annual growth rate of consumer prices remained at 1.5% and is in line with the expectations. Risks surrounding the inflation forecast of 1.6% for 2018 have been assessed as balanced.
The latest data on the foreign reserves showed their further rise, given further favorable developments on the foreign exchange market and interventions with foreign currency by the NBRM. Movements in the foreign reserves in the period October - November are higher than expected with the October forecast, and the analyses of adequacy indicators show that they are still maintained in a safe zone. Regarding the external sector indicators for the last quarter, their number for now is restricted. Currency exchange market data as of the second 10-day period of November point to net inflows in line with the expectations in October forecast.
The performance in the external trade statistics in October also indicate a trade deficit within the projection. Regarding the performances in the balance of payments, the data for the third quarter of this year indicate a higher surplus in the current account compared to the October projection, as well as somewhat higher net outflows than expected for this period.
Regarding monetary developments, initial monetary data for November show significant acceleration of the monthly growth, deposits and loans. In addition, an increase was also registered in both, households savings and corporate deposits. The growth of the lending activity is almost equally contributed by the household sector and the enterprises sector. In the period October - November, the deposit and loan performances are within the expectations for this period according to the October forecasts.
On the domestic money markets, stable activities were registered, amid maintenance of the favorable liquidity in the banking system. Namely, in the period between the two sessions of the Committee, the denar liquid assets of the banks increased primarily due to the continuous foreign currency inflows and the NBRM interventions for the purchase of foreign currency, which equaled Euro 17.6 million in November and Euro 4.8 million in the first ten days of December. Given these performances, the cumulative purchase of foreign currency of the NBRM since the beginning of the year as of 10 November equaled Euro 319.7 million, which is the highest purchase in the last ten years. The purchase of the NBRM on excess foreign currency on the foreign exchange market takes place in conditions of stable foreign exchange liquidity of the banks, which allows to fully meet the seasonally higher net demand for foreign currency of the clients from the corporate sector.
The banks regulated the short-term fluctuations in the denar liquidity during November through placement in the deposit facilities with the NBRM, which provide high flexibility and availability of funds for smooth credit support to domestic economic agents.
In November, there are variable movements in the international financial markets with increased risk aversion by investors, which has caused demand for safe financial instruments in the eurozone and the US to increase. The market sentiment was driven by the weaker macroeconomic indicators in the eurozone, and amid growing concerns about the slowdown in economic growth, investors reduced the expectations for the normalization dynamics of the monetary policy of the European Central Bank during the next year. Signals for gradual cessation with the increase in the interest rates were also observed in US markets, following a statement by the central bank president that the current level of the policy rate in the United States is only moderately lower than the neutral level. In conditions of increased oil supply and reduced prospects for global economic growth, oil prices have dropped to the lowest level in the last seven months.
In summary, at the meeting, the Committee concluded that according to the current economic and financial conditions, the perceptions of the monetary policy environment are somewhat more favorable than before, which suggests that there is room for further monetary policy easing. This primarily refers to the foreign exchange market, where the movements remain favorable, reflecting the improved foreign exchange position of the corporate sector, as well as the favorable movements on the currency exchange market. Yet, the conclusion remains that there are risks from both the domestic and the external environment, which can change the favorable trends. The NBRM will continue to closely monitor the trends in the next period in the context of the monetary policy setup.
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