On 12 October 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
On 12 October 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 Operational Monetary Policy Committee decided to retain the interest rate on the CB bills at the level of 4%, while the supply of CB bills at the CB bills auctions held on 12 October to remain unchanged and to equal Denar 22,000 million.
The signals for stabilization of the expectations of the economic agents were evident also in September and October. On the foreign exchange market, solid developments continued during these months, with the NBRM purchasing foreign currency for the fourth consecutive months, thus filling in the foreign reserves. The preliminary September data show further increase in household saving in the banking system, with signals for increased saving in domestic currency being also present. The estimations for the soundness of the economic fundaments remain positive.
The available high frequency indicators of the movements in individual economic sectors suggest growth continuation in the third quarter, at similar pace as in the first half of the year. However, according to published data on GDP growth for the first half of the year, the performance was lower than the expectations presented in the April projection, indicating the likelihood of a downward adjustment of projected economic growth for the whole 2016.
In terms of inflation, the average annual change in domestic consumer prices in the first nine months of the year remained in the negative zone, amid lower food and energy import prices. On the other hand, the core inflation registered positive annual growth rates thus indicating solid domestic demand. Inflation performances so far indicate lower inflation than projected, and the risks to the projection remain associated with the variability of expectations about the changes in world energy and food prices.
The latest data on foreign reserves in September showed high quarterly growth, emanating from the Government borrowing on the international financial market in July, the NBRM interventions by purchase on the foreign exchange market and the growth of the banks' foreign currency deposits with the NBRM. All foreign reserves adequacy indicators show that they continually hover in a safe zone. Regarding the performance of the external sector, the available data for the third quarter show that the trade deficit and the net purchase on the currency exchange market, as an indicator of private transfers, move in within expectations.
The movements on the foreign exchange market in September were affected by the usual seasonal factors, due to which in the bank - customer transactions moderate net sale of foreign exchange was registered. Compared to the same month of 2015, the developments in September were favorable, mainly due to companies' lower net demand for foreign currency. In transactions with the natural persons, also in September, the supply of and the demand for foreign currency has been relatively stable and the net purchase of these customers was at the level of last year's amount.
Such movements on the foreign exchange market, as well as the relatively higher growth of foreign assets compared to the growth of the banks' foreign liabilities, led to increased supply of foreign currency on the interbank market for foreign currency and maintenance of low denar exchange rate.
The National Bank intervened also in September by purchasing foreign currency from market makers (registering Euro 18 million), and this trend continues also in early October. Thus, the total amount of interventions for purchase of foreign currency by the National Bank during the summer, as of the beginning of October, amounted to Euro 91.3 million, which made up over 70% of sales during the speculative attack on the exchange rate this year. The high foreign currency liquidity in September allowed the banks to further actively place foreign currency deposits in the longer term (6 and 12 months) at positive rates, with the National Bank.
The interventions in September improved the banks' denar liquidity, which enabled banks, on average, to increase the average amount of funds placed in short-term monetary instruments, and shows moderately increased interest in longer-term investment opportunities.
The temporary lack of liquidity of individual banks was effectively compensated on the money market, where banks mostly traded in interbank deposits.
Further stabilization of the economic agents' expectations is also evident through the changes in the banks' deposit base. The preliminary data on September showed further growth of household deposits, but faster than in the previous two months. On the other hand, after the strong growth in the previous month, in September the deposits of the corporate sector declined. Such oscillations in changes of corporate deposits are common and reflect the normal operations of the companies. In the third quarter, the total deposit base of banks increased significantly, but because of weaker performance in the previous period, the level of deposits continues to be lower than projected.
The data on credit market for September show solid growth in total loans to the private sector compared to August, amid increase in lending to both households and corporate sector. The annual growth rate of the total loans in September is close to the projection, but given the weaker performances in the deposit potential and present uncertainty, there are risks to the dynamics of the lending activity in the next period.
In the first half of September, volatile movements prevailed on the financial markets due to perceptions that major central banks may begin reviewing and gradually reduce the stimulus programs. Such trends have stabilized after the FED meeting, at which it was pointed to a tightening of policy in December, which will continue in 2017, but moderately. At the end of the month, the OPEC countries reached an agreement to cut oil production, leading to a moderate rise in the price of this fuel.
The economic and the financial conditions, as well as the assessment of the present risks show that the current monetary setup is appropriate. Following the measures taken by the NBRM at the beginning of May, the latest data show a significant stabilization of movements, which should continue in the next period. However, there is still uncertainty related to the domestic political developments and global environment.
The NBRM will continue to closely monitor the developments in the period ahead, and if appropriate, it will accommodate the monetary policy for successful achievement of the statutory objectives.