On 9 February 2016, 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 light of the monetary policy setup
On 9 February 2016, 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 light of the monetary policy setup.
The assessment of the economic and financial conditions showed that the current monetary policy setup is adequate and the Operational Monetary Policy Committee decided the CB bills offered at the auction to be in the amount of Denar 25,500 million, at an unchanged interest rate of 3.25%.
The latest indicators suggest that the economic activity continues to grow at a solid pace, supported in part by the lending of domestic banks. Economic recovery takes place in the absence of price pressures or pressures in the external sector. Foreign reserves are still at an appropriate level, sufficient to cope with any unforeseen shocks in the future. The effects of the domestic political developments are assessed to be limited. Yet, uncertainty can still be observed in the surrounding, thus creating risks for the period ahead. Against such background, leaving the zone of accommodative monetary policy in the next period will depend on the further stabilization of the domestic political context and its effects on the economy, as well as on the changes in the external position and the effects on foreign reserves.
The latest macroeconomic indicators do not reveal major changes in the monetary policy setup. The real sector continues registering favorable trends. After the GDP growth of 3.5% in the third quarter, recent available indicators for the last quarter suggest continuation of these trends, particularly in the industry, trade and construction. The movements in the indicators of economic activity thus far suggest likelihood of a moderately higher than expected growth in 2015. Yet, notwithstanding these favorable trends, the uncertain global recovery, particularly unfavorable trends in the global metal market, and the uncertainty arising from the domestic political upheavals are risks that may influence the pace of future recovery.
In the absence of new data on inflation since the beginning of 2016, changes in external assumptions still point to downward risks to the projected inflation for the coming period. These assessments reflect the February downward revisions of the global prices of oil and primary food commodities projected in October. However, one should bear in mind the great uncertainty about the future movements in the global primary food prices and the possibility of sudden changes in this category.
Recent foreign reserves data (adjusted for the effects of price and exchange rate differences and price changes of securities), as of January, show that they have been moderately decreasing since the beginning of 2016. The changes in foreign reserves at the beginning of the year are as projected in October, showing that the position of the balance of payments is as expected. However, the number of available external sector indicators at the beginning of the year is limited, and therefore, it may not accurately point to the sources of change in foreign reserves, from this aspect. Foreign reserves adequacy indicators remain within the safe zone.
In January, in the transactions with all clients on the foreign exchange market, banks sold net amount of foreign currency higher than the net sales in the same month in 2015. These performances are due to the lower purchase of foreign currency of banks from exchange offices, mainly due to the high base effect related to the increase in the supply of Swiss francs in January 2015, shortly after the decision of the Central Bank of Switzerland to stop defending the exchange rate against appreciation. On the other hand, relatively more favorable performances on an annual basis have been reported in transactions with firms due to the higher foreign currency supply from the new production facilities and the tobacco industry. The banks, apart from their own sources, replenished part of the necessary foreign currency from the interbank market and transactions with the National Bank.
Analyzing credit market, after the strong credit growth in the last quarter of 2015, particularly in December, preliminary data for January show a decrease in total loans to the private sector. The monthly decline in loans results from the reduced lending to the corporate sector, which is not unusual for the first month of the year. Loans to households continued to grow on a monthly basis but at a moderately slower pace compared to the previous month. Given the strong credit growth in the last quarter of 2015 that exceeded the expectations, the annual growth rate of total loans in January was around 9%, which is above the projection for the first quarter of 2016. Observing the deposit potential, total deposits declined in January, following the strong growth in the previous month, bringing their annual pace close to the expectations of the October projections.
Banks’ liquidity under the influence of autonomous factors, in January, declined and urged banks to reduce the amount of funds placed in deposit facility with the National Bank. Given the reduced liquidity, in January, banks actively traded in deposits, and the interbank interest rate remained relatively stable at about 1.0%. In addition, the favorable trends on the secondary market continued in January, where besides in CB bills, market participants also reported higher volume of trading in government securities.
International markets in January reported volatility and risk aversion, amid expectations for further slowdown of economic activity in China, falling stock markets and oil prices. In the euro area, macroeconomic indicators pointed to a moderate economic growth, and at the meeting, the ECB announced a review of the monetary policy. Amid concerns about global growth and performance of the US economy, the Fed kept the interest rate unchanged, while there was an increased market uncertainty about the pace and intensity of the potential tightening of monetary policy by the end of the year.
Overall, recent developments suggest similar macroeconomic landscape as projected in October, with solid economic and credit growth, absence of price pressures and balance of payment position that ensures maintenance of foreign reserves at an adequate level. The fundamentals of the economy remain solid. Risks have arisen both from the external and the uncertain domestic surrounding. Exogenous factors remain associated to the possible changes in the pace of recovery of the global economic growth, as well as to the movements in prices of primary products in world markets. Analyzing domestic risks, although thus far their impact was relatively small and limited, any continued uncertainty related to political developments leads to the possibility for its spillover to the economy, because of the greater restraint of domestic and foreign investors. However, some risks have been mitigated by the NBRM measures taken in the reserve requirement instrument, which aim to further support long-term savings in domestic currency and thereby, support the process of "denarization" of the economy. The December set of measures to slow the rapid growth of long-term consumer loans acted in the same direction, which simultaneously enable and facilitate the conditions for corporate financing. Furthermore, the extension of validity of the non-standard measure in the reserve requirement to the end of 2017 further supports lending to systemically important sectors of the domestic economy, namely, net exporters and domestic producers of electricity.
The NBRM will continue to closely monitor the developments in the period ahead, and if appropriate, will accommodate the monetary policy for successful achievement of the monetary policy objectives.