The NBRM's Operational Monetary Policy Committee held its regular meeting

On 9 January 2018, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the domestic economy, the developments on the international and domestic financial markets and the indicators of the domestic economy in the context of the monetary policy setup.

The Committee assessed that the monetary setup is appropriate and decided the CB bills auction on 10 January to be conducted under unchanged conditions, i.e. to offer CB bills in the amount of Denar 25,000 million at interest rate of 3.25%.

The Committee reviewed the latest developments in the domestic economy in the context of the macroeconomic forecasts from November last year, concluding that the economic fundamentals are sound, without any imbalances in the economy. However, the Committee emphasized that there are still segments where certain risks are present and that point to the need for a sustainable improvement of the expectations and confidence of the economic agents. In such conditions of sound economic fundamentals, but still present risks, vigilance is needed regarding the changes in the monetary setup.

Analyzing the latest macroeconomic indicators, after the decline in the activity in the first half of 2017 and the moderate recovery in the third quarter, the available high frequency indicators for the activity in the last quarter of the previous year generally indicate a further recovery of the economy. This statement is underpinned by the data on the activity of the industry and the trade, while construction activity continued to decrease. Also, the indicators of the economic sentiment of the economic agents indicate better economic conditions in the last quarter.

Data on inflation for 2017 show an average annual growth of the price level of 1.4%, driven by the growth of core inflation, and less by the energy component. The realization with the inflation is in line with the forecasted average inflation for 2017 of 1.3%. Amid performances within the forecast, and with a simultaneous revision of the expectations for the individual import prices in different directions, for the time being the risks around the forecasted inflation for 2018 of 2% are assessed as balanced.

In the last quarter of the previous year, foreign reserves registered growth, amid favorable foreign exchange market developments and NBRM interventions with net purchase of foreign currency. The movements of reserves in the last period are better than the expectations, and all foreign reserves adequacy indicators remain within the safe zone.

The number of available external sector data for the last quarter is limited, but the available external trade data as of November last year and the currency exchange operations data, as key current account components, point to somewhat smaller current account deficit than expected.

In the absence of new data on the monetary and credit aggregates, the assessments given with the November data, according to which deposit and credit flows move in line with the expectations, remain. Monetary data for November last year, similar to October, showed a solid monthly increase in the total deposits in the banking system as a result of household deposits, but also of the growth of corporate deposits.  On an annual basis, in November, total deposits increased by 5.7%. Lending on the credit market continued to increase rapidly, amid almost equal distribution of loans to the households sector and the corporate sector, whereby the total lending activity registered annual growth of 5.6%.

In the period between the two monthly meetings of the Committee, the liquidity in the banking system recorded a relatively high growth, which is due to the National Bank interventions to purchase foreign currency from market makers, in the amount of Euro 44.7 million. The relatively high purchase of foreign currency in the analyzed period was realized in conditions of favorable foreign exchange market developments, which were manifested by growth of the supply of foreign currency by exchange offices, as a seasonal effect before the Christmas and New Year holidays and lower net demand for foreign currency by companies, on a monthly basis. With these developments, on a cumulative basis in 2017, the National Bank realized a relatively high net purchase of foreign currency in the amount of Euro 65.6 million.

During December last year, banks compensated the short-term liquidity needs of the interbank deposit market, and part of the excess free liquid funds was channeled into deposit facility with the National Bank.

On the international financial markets, during the last month, the meetings of the ECB and the Fed were in the focus of the attention of market participants. The ECB meeting confirmed the stand on continuation of the securities purchase program at least until September 2018, while the forecasts for the economic growth of the euro area were revised upwards. Moreover, during the previous month, the published macroeconomic data for the euro area were favorable, which enabled strengthening of the value of the euro. Thus, during 2017, the euro appreciated by around 14% against the US dollar, which is mainly associated with the reduced perceptions of political risks and the solid economic performances in the euro area. In the United States, the Fed made a decision to increase the interest rate spread target by 25 basis points, at a level of 1.25% to 1.5%, with further improvement of the labor market conditions and solid economic performances. Additionally, the tax reform was adopted, according to the proposals of the US president, which contributed to increase in the yields of US government bonds. 

In summary, at the meeting, the Committee concluded that the current economic and financial conditions, and the existing risks suggest that the current monetary setup so far is appropriate. The external position, if one assesses by the performances in the current account of the balance of payments, is generally within the expectations and shows maintenance of sound economic fundamentals.

In the period ahead, the National Bank will closely monitor all economic indicators and developments in the domestic economy, while the future changes in the monetary policy will greatly be conditioned by the developments in the domestic economy and the external sector.