On 9 April 2019, the National Bank’s Operational Monetary Policy Committee held a regular meeting and discussed the key domestic economy indicators and the developments on the international and domestic financial markets in the context of the monetary policy setup.

After the interest rate cut in in the previous month, at this meeting the Committee assessed that the monetary setup is adequate to the current economic and financial conditions, and decided to keep the interest rate on CB bills at the level of 2.25%. At the meeting, the Committee also decided to keep the supply of CB bills, for the auction to be held on 10 April 2019, at the level of Denar 25,000 million.

The comparison of the latest macroeconomic indicators with their dynamics forecast in October indicates certain deviations in some economic segments. The currently available high frequency data on the January - February 2019 period indicate continuation of favorable developments in the economy, evident through the accelerated growth in industry and trade, as well as through significant growth acceleration in construction. This, accompanied with the increase in the economic activity in 2018 of 2.7%, which is over the projection, corresponds with the expectations for gradual acceleration of the economic growth in the following period.

Regarding the inflationary movements, the average annual inflation rate in the first quarter of 2019 is 1.2%, which is below the projected level in October. The latest estimates indicate smaller pressures of the import prices in 2019. In such conditions, risks relating the projected inflation rate for this year of about 2% are currently assessed as downward.

The available data on the foreign trade statistics for January and February point to the possibility for slightly higher trade deficit than expected for the first quarter of this year. In addition, the data on the currency exchange market as of the second decade of March indicate net inflows from private transfers which are close to the expectations for the first quarter of 2019.  At the end of March, the foreign reserves were slightly lower compared to the end of last year, with their level remaining high and maintaining in the safe zone. On the foreign exchange market, the movements are still favorable, and the National Bank intervened with the purchase of foreign currency from the banks.

In terms of monetary movements, preliminary monetary data for March show monthly growth in both deposits and loans. Due to better performance at the end of 2018, on annual basis, the deposit growth continues to exceed the projected one for the end of the first quarter of this year. Regarding the lending activity, the weaker performances at the end of last year contribute towards lower lending than expected, and thus slightly lower annual growth compared to the projected one.

In the period between the two meetings of the Committee, the liquidity of the domestic banks remained relatively stable and high, so the banks have no need to borrow on the interbank uncollateralized deposit market. The banks continued to redirect the excess free funds to the deposit facilities with the National Bank, which provide high flexibility and availability of funds for smooth credit support to domestic entities.

In March, in conditions of higher demand for foreign currency, the banks were selling net foreign currency in transactions with customers. The banks satisfied the increased demand for foreign currency from their own foreign exchange liquidity. The National Bank intervened by moderate purchase of foreign currency from the market makers.   

Regarding the global economy, high-frequency indicators point to slower economic growth. In the euro area, despite the moderately more favorable signals for boosting domestic demand, economic performance remains uncertain, especially having in mind weaker indicators for the industrial sector in Germany. In such circumstances, the central banks on both sides of the Atlantic acted towards providing further support to the economy through monetary policy.

At the beginning of the month, the ECB pointed out that there are grounds for concern about the structural slowdown in the European economy, and therefore announced the maintenance of a low or negative level of interest rates at least by the end of this year, as well as conducting additional operations for securing liquidity for the purpose of strengthening the credit support to the real economy. In conditions of expectations for lower economic growth, the US central bank as well changed the monetary policy direction, i.e. it announced that the interest rates will not increase by the end of the year. Additionally, the liquidity in the system will be maintained higher so that in September, the US central bank will stop the reduction in the amount of securities in its balance i.e. the funds from the due securities will be reinvested again to the maturity level.

Such macroeconomic and monetary factors in the euro area have led to a drop in yields on government bonds to extremely low levels, and the euro registered depreciation against the US dollar.

In general, at the meeting it was concluded that since the reduction of the interest rate in March, no major changes in the trends of key monetary policy indicators have been noticed. The latest macroeconomic indicators and assessments do not indicate certain deviations in terms of the forecasted dynamics, but the perceptions about the environment for monetary policy conduct are mainly unchanged compared to the previous forecasts. New estimations of macroeconomic variables and risks within the regular spring projection cycle are underway. The National Bank will continue to carefully monitor the trends and potential risks, in the context of the monetary policy setup.