At the Committee's meeting, the existing monetary setup was evaluated as appropriate to the current economic conditions

On 13 June 2017, 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 light of the monetary policy setup.

At the Committee's meeting, the existing monetary setup was evaluated as appropriate to the current economic conditions. The Committee concluded that most indicators important for the monetary policy are favorable and do not deviate from the expectations, but however there are points where certain vigilance is required.  Thus, the stable developments in the currency market are especially important, without present pressures, and the foreign reserves indicators remain at an appropriate level.  

In such conditions, in the presence of some uncertainty and risks, the CB bills interest rate was maintained at an unchanged level of 3.25%.  Also, it was decided that in the auction which will be held on 14 June, the CB bills supply shall remain unchanged and amount to Denar 30.000 million.  

In terms of specific economic indicators, the published GDP data for the first quarter suggest stagnation of the economic activity.  Structurally, the export sector and private consumption continue to grow, and additionally, in this quarter, investments have a positive impulse on the economy.  However, in conditions of stronger import pressures, the overall economic activity stagnated, compared to the expectations for economy growth during this period.  The lower performances create downward risks for the BDP projection of 2.5% for the whole 2017.  The number of available high frequency indicators for the second quarter is limited, and also the indicators point to different directions of development, making it difficult to form precise assessment in terms of the condition of the economy for this quarter.  

In May, inflation data suggest an annual inflation rate of 1.2%, while the average annual price growth in the first five month amounts to 0.7%.  These performances are primarily due to core inflation, and the energy prices to a lesser extent, compared to the still negative contribution of the food prices.  Performances in inflation, are mainly in accordance with the projection, and the input assumptions expectations for the primary product import prices are mainly downward, yet extremely volatile.  In such conditions, the risks around the projection of the average inflation for 2017 (1.3%) are assessed as balanced. 

In terms of the external sector, data on foreign reserves for April and May show a decline compared to the end of the first quarter, which was within the expected developments.  Thus, all foreign reserves adequacy indicators show that they constantly hover in a safe zone.  In terms of the available indicators for the external sector, their number is small, and so far show favorable developments of the expected.  This conclusion refers to the foreign exchange market as of the second decade in May, and for the data for external trade in April.  Therefore, in April, export of goods registered an annual growth of 5.3%, amid import growth of 2.2%, which led to decline in the trade deficit on an annual basis and indications for better developments from the assessed within the second quarter.  However, the short period and the volatile seasonal dynamics are a limiting factor for making more reliable conclusions in terms of the expectations for the indicators of the external sector for the entire quarter.

In terms of the banking system, the preliminary data for May 2017 show a monthly decline of the deposit base, for the fifth consecutive month.  However, unlike in the two previous months, a minimal growth of household deposits is registered in May, amid savings increase in domestic currency.  The total deposits' level, so far is under the projections and points to certain risks in this segment.  On the other hand, in May, the lending activity continued to grow at a solid pace, mostly as a result to the credit support of the households, and the moderate growth of corporate lending.  The lending pace is in line with the expected developments.  

Banks' liquidity, after the one-time decline in April, continued the upward trend in May which is typical from the beginning of the last quarter of 2016 onwards.  The monthly growth of liquid assets is mostly due to the effect from the government's transactions associated with the commencement of payments of agriculture subsidies which was partially neutralized with the interventions of the National Bank which were directed to the sale of foreign currencies.  

In May, a seasonal growth of the foreign currency demand was registered in the foreign currency market, primarily by the companies, which was partially compensated by the strong foreign currency supply by the exchange offices.  Additionally, part of the foreign currency demand was covered by banks' own funds, which decrease their foreign currency assets, growth of the foreign currency demand in the interbank market and interventions of the National Bank for providing banks with the needed foreign currency liquidity.  During this month, banks actively traded in the money markets, and in order to efficiently manage the liquidity, the excess funds in their accounts continued to be directed to the deposits with the National Bank. 

The market participants in the Euro area were expecting the ECB meeting and the parliamentary elections in the United Kingdom and France, whereby in the markets there was a propensity for undertaking risks.   At the ECB's meeting in the beginning of June, the possibility for further reduction of the interest rates was ruled out, whereas the inflation projections for 2019 were revised downwards.  On the other hand, in the international markets there is a great certainty for further normalization of FED's monetary policy at the meeting in June. 

At the meeting was concluded that the continuous economic and financial conditions, as well as existing risks suggest that so far the continuous monetary setup is appropriate.  The external position, viewed through the performances in foreign reserves is within the expectations for the second quarter and shows retention of the sound economic fundamentals. The data on credit flows also point to such conclusion.  On the other hand, the preliminary GDP data point to a significantly weaker economic activity in the first quarter of the year, which creates risks for the assessments of growth for 2017.  Also, the performances in household savings continue to be "anemic" and point to room for further improvement of the expectations and confidence.  

The National Bank, in the coming period, will closely monitor all the 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.