The National Bank Council has held its regular session

Today, the National Bank Council has held its regular session and has discussed and adopted the latest Quarterly Report and Macroeconomic Forecasts for the period 2019-2021.

In the first quarter of this year, monetary easing continued by cutting the policy rate from 2.5% to 2.25%, as a result of the absence of pressures of the external sector on the foreign exchange market and the stable expectations of the domestic agents, amid further total deposit growth and low and stable inflation rate. Room for monetary easing was also made with the ECB's announcement for keeping the policy rates at the current level longer than previously expected as well as for further monetary easing in the euro area through other monetary instruments.

Regarding the latest macroeconomic forecasts, the Report does not indicate major changes in the macroeconomic landscape, compared to the October forecast. Namely, these forecasts also show further acceleration of the domestic economy growth in the coming period. Given the somewhat higher than forecasted growth for 2018, as well as the more favorable domestic environment, amid less favorable external environment and increased risks from the external environment, the latest forecasts confirm the October expectations for economic growth of 3.5% this year, further acceleration to 3.8% for 2020 and 4% in 2021. Domestic demand is expected to be conducive to the sources of growth, amid further private consumption growth and investment recovery, with positive contribution expected from the enhancing export sector activity.

Regarding the future price trajectory in the domestic economy, the latest forecasts point to maintenance of environment of stable prices and absence of significant inflationary pressures. The lower current performance and expectations for weaker pressures from primary commodities prices and foreign effective inflation in the upcoming period resulted in downward correction of the domestic inflation forecast for this year, i.e. the inflation was revised to 1.5%, despite the previously expected 2%. According to the latest findings, the pace of increase in domestic prices for 2020 and 2021 is expected to be about 2%, as previously forecasted.

The Report emphasizes that the latest balance of payments assessments indicate favorable external position and absence of imbalances in the economy. The current account deficit in the period 2019-2021 is expected to be moderate of around 1.3% of GDP, on average. The foreign reserves adequacy indicators show that they will remain in the safe zone during the forecast horizon.

The lending activity of the banking sector is still considered an important factor of support for the economic growth, whereby it is expected that the credit growth this year and the next two years will be 8%. The credit growth estimates are based on assumptions for stable expectations, increased deposit base and favorable capital and liquidity position of banks. The total deposits in the financial system this year and the next two years are expected to increase by 8.4%, on average.

Regarding the risks surrounding the macroeconomic scenario, the unfavorable risks in the external environment are assessed as more pronounced compared to the previous forecast cycle. They are mainly attributed to the present uncertainty fueled by the global trade tensions, volatility of financial conditions and prices of primary commodities, uncertain outcome of Brexit, and geopolitical risks. On the other hand, the domestic environment is assessed as stable, with possibilities for accelerated Euro-Atlantic integration as a positive risk, which is not directly embedded in the forecasts.

Generally speaking, the latest macroeconomic forecasts presented in the Report point to safe and sound fundamentals of the domestic economy, with potential for solid growth supported by the banks’ lending activity, amid absence of inflationary pressures and favorable external position. This macroeconomic scenario assumes stable and predictable domestic environment, further inflow of foreign investments, enhanced public infrastructure cycle, and relatively favorable external environment, slightly more favorable though, compared to the October forecast. Any failure of materialization of the embedded assumptions or risks may cause deviations from the forecast path of the key indicators.

As highlighted in the Council meeting, in the period ahead, the National Bank will closely monitor the trends and changes in the domestic and external environment, with the aim of accommodating monetary policy setup.