On 12 July 2016, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the banking system, the indicators of the domestic economy and the developments on the international and domestic financial markets in the light of the monetary policy setup.

At the meeting it was agreed that the 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 22,000 million, at an unchanged interest rate of 4%.

Recently, signs of stabilization in the expectations have been evident, with the assessments for soundness of the economic fundamentals remaining positive. 

Hence, the monetary policy tightening in early May, for now, is assessed as sufficient reaction to soothe the pressures on the foreign exchange market and the banks' deposit base, which were caused by domestic non-economic factors.

The data on the gross domestic product for the first quarter of the year confirmed the economic growth, which was lower than expected, and the available high-frequency indicators for April and May suggest continuation, but at a slower pace compared to the first quarter. The domestic non-economic factors related to political developments in the country further raise the uncertainty about the performance and evaluation of the economic activity in the next period.

In terms of inflation, the average annual change in domestic consumer prices remained in the negative zone, amid lower food and energy prices. On the other hand, the core inflation continued to increase moderately. Inflation performances so far do not indicate more significant deviations than projected, and the risks to the projection by the end of the year remain associated with the variability of expectations about the changes in international energy and food prices.

In June, the developments on the foreign exchange market significantly stabilized and reached a normal pace. Thus, after two months of net sale of foreign currency by banks to natural persons, in June, banks had a net purchase of foreign currency from the natural persons, given the significantly reduced demand for foreign currency and growth in the supply of foreign currency. Exchange offices were an additional factor for higher supply of foreign currency, whose net purchase from the natural persons increased, both monthly and annually. Given such developments, in the first half of June, the National Bank did not intervene on the foreign exchange market, and at the end of the month, only in several occasions, it compensated some of the seasonal increased demand for foreign currency from the companies, which is the lowest net sale of foreign currency in the last three months.

The latest data on the foreign reserves, as of June, show quarterly decrease. Major factor for the decrease in the foreign reserves during this period are the NBRM interventions on the foreign exchange market in response to increased demand for foreign currency, given the unstable political environment. From April 19 to May 23, the NBRM intervened in the foreign exchange market with a sale of Euro 129 million, which closed the gap between demand for and supply of foreign currency and maintained the exchange rate stability. In May, the National Bank measures to deal with speculations about the stability of the denar exchange rate contributed to a constant decrease in the demand for foreign currency from the natural persons, which gradually returns to a usual pre-crisis level. Since the last week of May, the exchange market has been stable, indicating a significant stabilization of expectations and confidence of economic agents and smaller propensity for managing foreign exchange. The analysis of all foreign reserves adequacy indicators shows that they are still within safe zone.

For efficient liquidity management, in June, banks moderately reduced the amount of liquid assets invested in the short-term monetary instruments and also continued with active trading on the money markets, where turnover reached its highest level in the last two years.

The uncertain domestic environment reflected on banks' deposit base, which in May registered a decline of 0.5% on a monthly basis, significantly lower than that of April. Thus, the annual deposits growth rate reduced to 3.7%, performance lower than expected in the April projection. The decrease remains associated with the uncertainty about the political situation in the country, whereby the decline was entirely due to the further decrease in household deposits, amid growth of corporate deposits. Preliminary data for June show further downward trend in deposits, but smaller compared to May, whereby for the first time after the developments in April, households deposits registered a monthly increase, which is a signal for gradual stabilization of the perceptions of the economic agents.

In terms of the credit market, in April and May, the total loans to the private sector remained relatively stable, amid growth in household loans and fall in loans to the corporate sector. The stagnation of lending in part is a reflection of the write-off of past due claims, according to the decision of the NBRM adopted in December 2015, but probably, it is a reaction to the uncertain environment and the decrease in the deposit base. Thus, in May, the annual credit growth rate stood at 6.4% and without the effect of the write-offs amounted to 8.1%. The effects of the decision of the NBRM on the write off were felt most intensively in June 2016, when loans registered a significant monthly decline (of 1.5%) in both sectors. Thus, isolating the effect of the write-offs, in June, there was solid growth of lending in both households and the corporate sector.

The results of the United Kingdom European Union membership referendum showed that the majority of citizens voted to exit from the union (Brexit), which was a surprise to the markets and led to repulsion towards risk taking and investors' orientation to safe investments. In such conditions, policy makers of the global central banks continued to conduct accommodative monetary policy and at the same time, there were lower expectations for the Fed's policy tightening by the end of the year.

The economic and the financial conditions, as well as the assessment of the current risks show that the current monetary setup is appropriate. Recent data suggest significant stabilization of the movements after the measures taken by the NBRM. However, the uncertainty associated with domestic political developments and global environment is still present and further emphasized after the United Kingdom voting to exit from the European Union.

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 monetary objectives.