On 11 June 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.
The Committee assessed that the monetary setup is adequate to the current economic and financial conditions, and decided to maintain the CB bill interest rate at 2.25%. The Committee also decided to offer the same amount of CB bills i.e. Denar 25,000 million at the auction on 12 June 2019.
They also discussed the latest domestic economy developments in the context of the April macroeconomic forecasts. The Committee also finds the economic fundamentals to be sound, without any economic non-equilibrium. The lack of non-equilibrium is evident through stable inflation and favorable external position, a context that is conducive to favorable movements on the foreign exchange market and interventions for purchasing foreign currency by the National Bank at the beginning of the year. The dynamics and currency structure of household savings show stable expectations and favorable perceptions.
Regarding the latest macroeconomic indicators, according to the estimated official GDP data, the economic activity in the first quarter of this year registered an annual growth of 4.1%, which is in line with the expectations. The economic growth was prompted by the domestic demand, with small negative contribution of net exports. Given the limited scope of available data, it is difficult to make a precise assessment of the economy in the second quarter this year. The available high frequency data for April point to further favorable economic movements for now, as seen through the further growth of industrial output and trade.
The average annual inflation in the first five months was 1.4%, with expectations for inflation rate of 1.5% for the entire 2019. For now, risks to the inflation forecast for this year have been assessed as balanced.
Concerning the external sector indicators, only April foreign trade data are available for the time being; yet a period of one month is short for making reliable conclusions in this area. Currency exchange market data as of the second 10 days of May, show that net inflows from private transfers are as expected for the second quarter. The balance of payments performances in the first quarter of this year indicate higher current account deficit than forecasted in April, as well as higher net financial inflows than expected for the same period. At the end of May, the foreign reserves were higher, compared to the end of last year, with all adequacy ratios being in the safe zone.
Concerning the monetary developments, after the growth in April, the preliminary data for May show a small monthly decline in total deposits, which mostly derives from the decline in the deposits of corporate and other sectors, with a slight decrease in household deposits. On the credit market, the monthly growth of credits, generated by the growth of household lending, continued in May. No major deviations from the expected dynamics of the monetary and credit aggregates have been noted for the time being.
In the period between the two Committee meetings, the bank liquidity remained relatively stable and high, which contributed to the low need for banks’ borrowing on the interbank deposit market. In such circumstances, banks continued to direct excess available funds to deposit facilities with the National Bank, which provide high flexibility and access to funds for smooth domestic lending.
On the foreign exchange market, there was a seasonal increase in net demand for foreign currency in May, which was fully met by the banks' own foreign assets. Additionally, amid flexible foreign assets and liabilities management, the banks directed a part of the surplus foreign liquidity to the interbank foreign exchange market, due to which the National Bank intervened with purchase of foreign currency from the market makers. As of May, the National Bank purchased Euro 72.5 million. Thus, in the first five months of this year, the central bank was present on the foreign exchange market only by purchasing foreign currency.
The renewed global trade tensions, with the aggravation of the US relations with China and Mexico in May, increased investors’ risk aversion on the international financial markets. As a result, the demand for government securities increased, thus rising their prices and consequently reducing yields on markets on both sides of the Atlantic, while strengthening the US dollar. The Fed monetary policy makers highlighted the need for cautious approach in adjusting interest rates for a certain period, as well as the willingness for appropriate monetary policy measures of cutting the interest rates in response to risks of aggravating trade relations on a global scale. In the ECB meeting in early June, it was pointed out that the EU interest rates are expected to remain unchanged by the first half of 2020, as opposed to the previous announcements that they will remain at that level by the end of this year. In the meeting, additional details were announced on the interest rate of the new targeted long-term refinancing operations (TLTRO III). In this context, globally influential central banks are still maintaining favorable monetary conditions in order to boost economic growth, but according to the initial estimates, recently announced customs changes in both the United States and China can contribute to lower global GDP in 2020 by 0.5 percentage points of the currently forecasted.
Overall, in the meeting, the Committee concluded that the macroeconomic indicators and assessments are generally as expected, and 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, particularly the uncertainty caused by the growing trade tensions. 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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