On 11 September 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.

After the reduction of the interest rate in August this year, the Committee assessed that the monetary setup is adequate to the current economic and financial conditions, and decided to keep the CB interest rate at the level of 2.75%. At the meeting, it was also decided to keep the offer of the CB bills, for the auction to be held on 12 September 2018, at the level of Denar 25,000 million. Generally, at this meeting the Committee maintained the so far 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 comparison between the latest macroeconomic indicators of the domestic economy and their dynamics forecast in April indicates divergence in some economic segments. According to the published estimated data, after the slight rise in the first quarter, the GDP growth significantly accelerated to 3.1% in the second quarter, which is still somewhat lower compared to the projection.

For the third quarter, given a limited scope of available data, the situation in the economy can not be assessed precisely, although most of the data point to continuation of favorable movements in the economy in this quarter of the year.

Regarding the inflationary movements, in the period January - August, 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 projection, it is estimated that the risks related to the projected 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. The increase in the foreign reserves is slightly higher than expected with the April forecast, and the analysis of foreign reserves adequacy indicators show that they are still maintained in a safe zone. The available external sector indicators are currently limited. The foreign trade data for the period January - July indicate developments that match the April forecast, while the available currency exchange market data show higher net inflows. Regarding the balance of payments, the data on the second quarter indicate improved performance in both current and financial transactions compared to the April forecast.

Preliminary monetary data on August 2018 show continuous growth in both deposits and loans. In August, the deposit base continued to grow with accelerated monthly dynamics, with the largest contribution being made by the corporate deposits, given the simultaneous increase in savings of households, as well. On the credit market, the monthly growth is still due to the household sector. On an annual basis, the growth in deposits and loans in August exceeded the projected annual growth for the third quarter of the year.

In the period between the two monthly meetings of the Committee, the denar liquid assets of the banks continued to increase, primarily due to the further NBRM interventions for purchase of foreign currency. The presence of the NBRM on the foreign exchange market for purchase of the excess foreign currency is mostly related to the continuous solid performances on the foreign exchange market, where for the second consecutive month, the banks buy foreign currency in transactions with clients on a net basis. These movements reflect the relatively better offer of foreign currency by the corporate sector, as well as the seasonally higher offer of exchange offices, characteristic for this period of the year. Market developments, coupled with the banks’ high foreign exchange liquidity, which had an upward trend influenced by the growth of foreign currency assets, led to the daily interventions of the NBRM with the market makers, and from the beginning of this year until 11 September 2018, Euro 234.1 million were purchased.      

The favorable denar liquidity position in most of the banks influenced towards reduced money markets activity also in August, with the banks placing part of the excess denar assets with the NBRM as deposit facilities.

At the international markets, the volatility increased in August, in conditions of intensified global trade relations and depreciation of the currencies of certain developing countries.

Consequently, whilst the investors were seeking for safe instruments, the value of the US dollar moderately increased, while the yields on government bonds in the euro area and the United States declined.

In addition, the European markets expanded the spreads between yields on government bonds of the peripheral economies and the heart of the euro area, mainly due to the concerns over the fiscal situation of Italy. Regarding the monetary policy setup of the globally influential central banks, the minutes from the July meeting of the FED - the US central bank pointed to the favorable perceptions for the US economy, so the market participants almost fully expected an increase in the target for the interest rate spread at a FED meeting in September.

According to the minutes of the meeting of the European Central Bank held in July, the stand to preserve the interest rates at the current level by the summer of 2019 was reiterated.

In summary, 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, but for now, they failed to cause larger 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 NBRM will continue to closely monitor all economic indicators in the context of the monetary policy setup.