On 10 July 2018, the NBRM 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.

At the meeting, the Committee concluded that the monetary setup is adequate to the existing economic and financial conditions, and therefore maintained the CB bill interest rate at the level of 3.00% and the offer of CB bills at the level of Denar 25,000 million. The Committee also confirmed the conclusions for sound economic fundamentals and stable expectations of economic agents seen through the favorable movements on the foreign exchange market and the growth of the banks’ deposit base.

According to the latest available data, at the meeting, it was concluded that generally, most of the key monetary policy indicators are within the expectations. Certain derogations have been observed in the economic activity, where the initial GDP data in the first quarter of 2018 point to a minor growth, which is below the forecast, reflecting the weaker growth in private consumption and the greater decline in investments. Such deviations also create downward risks for the forecast growth of 3.2% for 2018. The available data for the second quarter are not numerous, but are divergent, mainly pointing to a somewhat more favorable situation in the economy, compared to the first quarter. This is indicated by the trade turnover whose growth is somewhat stronger compared to the first quarter, the significant slowdown in the fall in the value of the completed construction works, as well as the improvement in the economic sentiment indicator.

According to June data, the average annual inflation in the first half of the year was 1.5%, which is still below the April forecast. Amid lower performances than forecast and upward revision of import price expectations, it is estimated that the risks surrounding the inflation forecast of 2% for 2018 are balanced. The uncertainty about the forecast movement of world primary commodities prices has remained the major risk for the inflation forecast.

Foreign reserves data for the second quarter of 2018 indicate growth compared to the end of the first quarter, amid favorable movements on the foreign exchange market and net purchase of foreign currency by the NBRM. Indicators for their adequacy show that they continue to remain in a safe zone. Foreign trade performances for April and May point to the possibility for slightly lower than expected trade deficit for the second quarter of 2018. As of the second 10-day period of June, currency exchange market registered higher net inflows from private transfers compared to the expectations for the second quarter.

Regarding the monetary sector developments, initial data for June show further monthly increase in deposits and lending activity. The monthly increase in total deposits was mostly due to the higher corporate deposits, amid positive, but relatively lower contribution of the household deposits. Regarding the credit market, the increased lending activity in June almost equally arises from loans granted to households and corporations. Deposit and credit flows during the April-June period are higher than the forecast for the second quarter of 2018, indicating that the forecast for this period has been exceeded.

In the period between the two monthly meetings of the Committee, the denar liquid assets of the banks continued to increase, which was mainly reflected in the National Bank's interventions for the purchase of the banks’ excess foreign currency. Namely, on the foreign exchange market, the movements were favorable, characterized by a continuously higher supply of foreign currency, despite the increased demand for foreign currency due to the payment of dividends and the banking sector’s deleveraging abroad. The continuation of the positive trends on the foreign exchange market in this period was supported by the increased supply of foreign currency from the corporate sector as well as the solid supply on the currency exchange market. Such movements ensured further growth of the high foreign exchange liquidity of the banks, and part of the market excess foreign currency was also directed towards the NBRM, which in June purchased Euro 20 million from the market makers. The favorable movements on the foreign exchange market continued in early July, due to which the National Bank additionally purchased foreign currency from the market makers, and the cumulative purchase since the beginning of the year reached Euro 88.5 million, which is the highest amount since 2007.

In the analyzed period, the increase in denar liquidity in the banking system reduced the banks’ need for borrowing on the money markets, where the interest rates remained at a relatively stable level. At the same time, after meeting the low market demand, the banks continued to place excess funds in the NBRM deposit facilities.

Over the past month, international financial markets have registered risk aversion during periods of intensification of global trade tensions and political risks in the euro area. In such conditions, the demand for safe haven currencies increased, and the US dollar strengthened against other currencies. As expected, the US Federal Reserve (Fed) raised the target level for the interest rate spread for the second time in 2018, anticipating total of four increases for the whole year. In such conditions, government bond yields in the United States moderately rose in the short-term segment of the yield curve. On the other hand, the financial instrument yields in the euro area moved in the opposite direction, with the European Central Bank (ECB) stating the slow and gradual normalization of the monetary policy setup. Namely, at the meeting, the ECB announced that the purchase of securities as part of the quantitative easing program is envisaged to be completed by the end of the year, and that the interest rates of the monetary instruments will remain at the current low and negative levels at least until the summer of 2019.

In summary, the Committee concluded that the latest macroeconomic indicators and assessments of certain segments suggest certain deviations from the forecast dynamics, but for now, they have not caused major changes in the perceptions for the monetary policy environment.

In the period ahead, the NBRM will closely monitor the developments in the domestic economy and especially in the external environment, where the growing trade protectionism increases the unfavorable risks. As required by the circumstances and the assessed risks, the NBRM will take appropriate measures for successful achievement of the monetary objectives, as needed.