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

On 13 February 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 light of the monetary policy setup.

The Committee assessed that the monetary setup is appropriate and decided the CB bills auction on 13 February to be conducted under unchanged conditions, i.e. to offer CB bills in the amount of Denar 25,000 million at an interest rate of 3.25%.

The Committee reviewed the latest developments in the domestic economy in the context of the macroeconomic forecasts from October last year, concluding that the economic fundamentals are sound, without any imbalances in the economy. Furthermore, it also concluded that the confidence and expectations of the economic agents further stabilized, as seen through the favorable movements on the foreign exchange market and the solid pace of deposit growth.

The comparison of the latest macroeconomic indicators for the domestic economy with their forecasted dynamics within the October forecast vintage generally does not indicate major deviations in the individual segments. Analyzing the economic activity, after the decline in the first half of 2017 and the moderate recovery in the third quarter, the available indicators for the activity in the last quarter of the previous year mainly indicate somewhat faster recovery of the economy compared to the third quarter. This statement is underpinned by data on the latest performance of the industry and the trade, while construction activity continued to decrease. The surveys indicate further retention of the confidence of economic entities.

Regarding the inflationary trends, in 2017, inflation was as forecasted, while the assessments for several import prices have been increased. However, taking into account their volatility, for now, the risks to the inflation forecast for 2018 of 2% have been assessed as balanced. 

Foreign reserves data in January indicate an increase, which was mostly due to transactions on behalf of the government as a result of the issuance of the sixth Eurobond on the international financial markets. The foreign reserves movements are mainly as expected, and the foreign reserves adequacy indicators remain within the safe zone. In the absence of more recent data on the balance of payments for 2017, there is still a possibility for lower current account deficit and somewhat lower net inflows in the financial account than expected.

Analyzing external sector indicators for the beginning of 2018, there are available data only on the currency exchange market as of the second 10 days of January that show that the net inflows of private transfers are as forecasted for the first quarter of 2018. However, the period is too short to draw any reliable conclusion. 

Regarding the monetary developments, at the end of 2017, the deposit and credit aggregates experienced a solid growth, which on an annual basis equaled 5.2% and 5.7%, respectively, and exceeded the expectations. At the credit market, the corporate lending registered certain acceleration. The lending performance corresponds with the results of the Lending Survey, which indicates a growth in the demand for loans and further easing of the credit standards. The initial monetary data for January point to a monthly decrease in both deposits and loans, which is expected and usual movement, and for now, the movements of these aggregates are not expected to deviate from the forecasts.

In the period between the two monthly meetings of the Committee, the banks' liquidity potential reduced, mainly due to the withdrawal of liquid assets through government transactions, which was partially offset by the seasonally lower demand for denar cash just before and after the New Year and Christmas holidays.

On the foreign exchange market, the favorable movements as of the end of December last year, marked by increased supply from the exchange offices, continued in early January this year, making the banks to purchase net foreign currency in transactions with all clients, and to direct part of the excess liquidity to the National Bank, which purchased Euro 5 million. To the end of the month, there was an increase in the demand for foreign currency from customers, which the banks fully secured on the interbank market from own funds. During this month, banks actively traded in the money markets, and the excess denar funds on their accounts continued to be directed to the deposit facilities with the National Bank.

In January, on the international financial markets there were perceptions for positive outlook for the growth of the world economy and for tightening of the monetary policies globally. At the ECB meeting, discussions were announced for reducing the stimulating policy, and at the FED meeting, which was the last presided over by President Janet Yellen, expectations were presented for higher inflation throughout the year. In such conditions, government bond yields have increased on both sides of the Atlantic, and stock prices have hit record highs, while the euro exchange rate has strengthened. Such movements shifted in February, when after the announcement for faster growth of wages for January in the United States than the previous performances and expectations, the stock indices registered a significant drop. Namely, the investors showed concern about potentially stronger inflationary pressures than forecasted by the central banks and about the expectations for more aggressive tightening of the monetary policies, which is why they settled the positions in shares, which have been continuously increasing in the last two years. In such conditions, government bond yields experienced short-term growth, and the market volatility indicators registered pronounced movements. In the following days, stock exchange indices recovered some of the losses and their movements slightly stabilized.

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, as assessed by the current account performances, is generally within the expectations and shows maintenance of sound economic fundamentals. In addition, some indicators point to further improvement of the expectations and the confidence of the economic agents. Any monetary response to such favorable movements is conditioned by their continuity in the period ahead.

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.