Regular meeting of the Operational Monetary Policy Committee of the National Bank

Regular meeting of the Operational Monetary Policy Committee of the National Bank 

On 16 December 2020, the National Bank Operational Monetary Policy Committee held its regular meeting and discussed the developments on the international and domestic financial markets and the indicators of the domestic economy in the context of the monetary policy setup. 

Following the cut in the interest rate on CB bills on three occasions since the beginning of the year, at this meeting, the Committee decided to keep it at the level of 1.5%. The decline in the key interest rate to the current level, as well as the current significant reduction of the offered amount of CB bills, contributed to increasing liquidity of the banking system and supporting credit flows in the economy. Given the already performed relaxation, and amid still present risks and uncertainty, at this meeting, the Committee decided to keep the interest rate on CB bills at the current level, as appropriate to the current economic and financial conditions. At the same time, the Committee assessed that the liquidity released through the main National Bank instrument of Denar 15 billion in April and May is appropriate, and decided at today’s auction to offer the same amount of CB bills of Denar 10 billion.

The latest available macroeconomic indicators suggest an annual decline in the gross domestic product in the first three quarters of the year of 5.9%, which is in line with the expectations of the October forecast. Most of the downward adjustment is a result of the performances in the second quarter of the year, when tougher restrictive measures for protection of public health were also introduced. The third quarter registered significant slowdown in the annual decline in GDP to 3.3%, in accordance with the temporary stabilization of the situation with the pandemic at this time of year and the relaxation of the measures for prevention of its spreading, coupled with the effect of the undertaken monetary and fiscal measures. The currently available high-frequency data for the fourth quarter of 2020, although in limited scope, indicate more moderate negative effects of the health crisis on the economic activity. This is visible through the slowdown in the annual rates of decline in industry and trade, in conditions of reintroduction of restrictive measures, but in a significantly milder form, compared to those from the beginning of the pandemic.

The average annual inflation rate is still at a low and stable level and for the first eleven months of the year it amounts to 1.1%, which is close to the forecasted inflation rate according to the October forecasting round. In such circumstances, amid revisions in different directions in the external input assumptions, currently, risks to the inflation forecast for 2020 have been assessed as balanced.

Foreign reserves are still at an adequate level and in the safe zone, at a pace of change which is expected according to the October forecast. Regarding the available external sector data for the fourth quarter, the currency exchange market data as of November point to performances in private transfers in line with the forecasts for the last quarter. At the same time, foreign trade data as of October point to the possibility for achieving a trade deficit within the foreacasts for the last quarter of the year. Also, the performance in the balance of payments in the third quarter of 2020 is mainly in line with the October forecast.

Analyzing total deposits and total loans, the initial November data show further solid annual growth, within the expectations according to the October forecast.

In the period from the last, November, meeting of the Committee onwards, the liquidity of the banking system in domestic currency continued to increase, which contributed to a very low need of banks to trade in short-term denar liquid assets on the money markets. In November, the foreign exchange market registered a moderately higher net demand for foreign currency by the corporate sector, typical for this month of year and a stable monthly net supply of foreign currency by natural persons on the currency and the foreign exchange markets. Market movements were accompanied by maintenance of the foreign currency liquidity of banks at a relatively stable and high level, which is why the National Bank participated with low and occasional daily interventions for sale of foreign currency. 

In November, the movements on the international financial markets were mostly conditioned by the optimistic information about the development of vaccines against COVID-19, which contributed to investors’ expectations that the global economic recovery will come sooner than expected. Consequently, the market participants had an increased interest for investments in shares, due to which the upward trend of the world stock exchange indices continued, reaching new highest levels. In such circumstances, there was a decrease in the value of the US dollar against the euro, a decline in the price of gold and in the prices of the safest government bonds in the euro area.

Overall, at the meeting of the Committee it was concluded that the flows have thus far been stable and the latest macroeconomic indicators are generally in line with the expectations, with unchanged perceptions for monetary environment compared to the previous assessment. However, the uncertainty and risks from the pandemic caused by COVID-19 are still present, both globally and within the domestic economy. In the period ahead, the National Bank will carefully monitor the trends and potential risks, in order to respond in an appropriate manner, if necessary.