On 12 May 2015, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the latest macroeconomic indicators and projections in the light of the monetary policy setup. It was assessed that the latest projections do not indicate major changes in the monetary policy setup and it was decided the CB bills offered at the auction to be in the amount that falls due (Denar 25,500 million), at an unchanged interest rate of 3.25%.
On 12 May 2015, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the latest macroeconomic indicators and projections in the light of the monetary policy setup. It was assessed that the latest projections do not indicate major changes in the monetary policy setup and it was decided the CB bills offered at the auction to be in the amount that falls due (Denar 25,500 million), at an unchanged interest rate of 3.25%.
The latest developments and forecasts have confirmed that the economy has still been recovering at a solid pace, in part supported by the lending of the domestic banks. Economic recovery takes place in the absence of price pressures. Against such background, there is a suitable environment for a sustained recovery of the private sector, and it was again assessed that the current support of the local economy through the monetary policy measures taken so far is sufficient. Leaving the zone of accommodative monetary policy in the next period will depend mainly on the changes in the external position of the economy and the effects on foreign reserves.
Data on the economic activity in 2014 showed that economic recovery is solid and continues at the expected pace. Given the retained assumptions for further improvement of the global environment, increased utilization of the potential of foreign export capacities, fiscal stimulus on investment and gradual recovery in consumption, the October assessments for further acceleration of the growth of the domestic economy in 2015 and in 2016 are retained. Despite the recovery of the economy, it is still expected that the demand will not create major pressures by accelerating the inflation and worsening the external position. The inflation outlook for 2015 is revised downwards, reflecting the significantly lower import prices. For 2016, further normalization of inflation is expected, as a combination of the rising demand and the growth of import prices. Estimates suggest keeping the inflation within acceptable frames in the next period.
Both the performances and the latest projections for the external sector show a smaller current account deficit compared with the expected. Such discrepancies are mainly due to the smaller pressure on the external sector due to the much lower than expected oil prices, but also due to fundamental improvements resulting from the structural changes in the export sector.
Considering the dynamics in the next two years, further increase in the current account deficit is expected, due to the estimated stabilization of private transfers, and partly due to the import pressures from investments. Forecasts further show sufficient capital inflows for financing the deficit in the next two years.
The estimated foreign reserves adequacy indicators point to a level of foreign reserves in the forthcoming period sufficient to cope with possible, unforeseen shocks.
The support for the economy through the domestic banking sector, which increased significantly in 2014, is expected to continue in the next two years, at an identical pace as in the October projection. These expectations are based on the assumptions for further positive developments in the private sector as a major factor on the side of credit demand, as well as on the growth of the deposit base and maintaining stable banks' perceptions of the risk as a major factor on the supply side.
Banks' liquidity remained relatively stable. In April, the autonomous factors acted towards a decline in liquidity, for the second month in a row, which contributed to lower banks' placements of excess liquidity in short-term standing deposits with the NBRM. On the money market, most of the turnover was realized on the segment with interbank uncollateralized deposits, and trading was conducted also on the secondary securities market. Given the high liquidity, in April the downward trend in the interbank interest rate continued, whereby it was reduced to a level below 1%. Amid intensive export activity of the facilities in the free economic zones, positive performances of traditional export segments, as well as accelerated construction activity associated with infrastructure projects, positive developments on the foreign exchange market continued. Thus, since the beginning of the year, the supply of foreign currency has been higher on an annual basis, and the demand is moderately lower compared to the same period last year, due to the lower imports of oil and electricity. In such conditions, amid simultaneously improved foreign currency liquidity of the banking system, temporary surpluses and shortages of foreign currency are reimbursed on the interbank foreign exchange market and the exchange rate is maintained at a stable level.
Internationally, the European Central Bank continued to create liquidity in the banking system through the implementation of the Programme of quantitative easing, as a result of which some positive developments were registered. The annual inflation rate in the euro area registered an upward correction, thus interrupting a four-month period of negative rates, the money supply growth accelerated, while lending to the private sector continued to increase on an annual basis. However, the uncertainty of the outcome of the negotiations between Greece and international creditors, which entered a new phase after the change of the Greek negotiating team remains a risk factor for the European economy. As for the United States, the start of the normalization of monetary policy by the Fed remains conditioned by the indicators of the US economy.
In general, recent macroeconomic forecasts point to maintaining of an economic image similar to that in the October projections, with estimates for solid economic and credit growth, absence of price pressures and balance of payments position which provides further maintenance of the foreign reserves at an adequate level. The risks around the achievement of this macroeconomic scenario remain to be mainly of an external nature, and are related to the possible changes in the pace of recovery of the global economic growth, as well as to the movements in the prices of primary products in world markets. External risks are still balanced in relation to the October projection, primarily because of improved expectations for the economies of the euro area. On the other hand, the baseline April macroeconomic projection is accompanied by new risks associated with domestic non-economic factors - uncertainty about political developments - which may adversely affect the domestic economy.
The NBRM will continue to closely monitor the developments in the period ahead, and if necessary it will make appropriate adjustments to the monetary policy conduct aimed at successful achievement of the monetary policy objectives.