At the regular session held on April 8, 2014, the NBRM's Operational Monetary Policy Committee reviewed the most recent macroeconomic indicators for the domestic economy and the developments on international and domestic financial markets, in the light of their impact on the monetary policy setup
At the regular session held on April 8, 2014, the NBRM's Operational Monetary Policy Committee reviewed the most recent macroeconomic indicators for the domestic economy and the developments on international and domestic financial markets, in the light of their impact on the monetary policy setup.
In March, the developments on the global financial markets were influenced by Fed's announcements for earlier than previously planned monetary tightening, through faster and more significant correction of the policy rate. Given the expectations for moderate acceleration of the economic activity in the first quarter of the year, however amid still high unemployment and absence of price pressures in the euro zone, in April, the European Central Bank kept the key interest rate at the same level.
Data on the economic activity in 2013, confirmed the expectations for a firm recovery of the domestic economy, with accomplished real GDP growth of 3.1%. The latest high frequency indicators for the first quarter of 2014, point toward retention of these favorable trends. Indicators for the industry and construction suggest further growth of the activity in these sectors, amid gradual recovery of foreign demand, increased activity of the new facilities and fiscal stimulus in the construction sector. Assessments that the economic growth will not cause major imbalances in the economy still remain. The latest data on the consumer prices in March 2014, confirm the gradual reduction of the inflationary pressures. The inflation still decelerates annually, and the average inflation rate for the first three months remains stable and amounts to 0.6%. A slowdown in the annual growth was noted also in the core inflation. Such movements of the inflation are mainly associated with the effects of the movements in the international prices of food and energy on domestic prices. March data on inflation confirmed the previous assessments for mostly downward risks associated with the inflation projection for 2014.
Preliminary data on the credit market in March, suggest further increase in the credit support to the economy through bank loans and accelerated monthly and annual credit growth. Credit flows on the credit market were directed towards both the corporate and the household sectors, with a greater contribution of the corporate sector. Realized credit activity is more intensive than anticipated in the October projection. However, the already announced downward risks on the credit growth by year-end are still present. They are related to the banks' perceptions of the demand risk and the conservative strategies of large banking groups that have their subsidiaries operating in the domestic market. In March, favorable movements were registered in the banks' deposit potential, which is still growing. The growth is a result of the increase in the deposits of both sectors, with the largest contribution of the corporate sector.
In March, banks' liquidity decreased under the influence of seasonal factors, which caused an increased interbank trading on the deposit market, especially with maturity up to 1 month.
The movements on the foreign exchange market were influenced by the common seasonal factors. According to the most recent data, foreign reserves continue to decline and move along the projected path. The October projection for the balance of payments indicated the need for financing of part of the current account deficit through foreign reserves in the first half of the year, whereafter according to the projected flows they are expected to increase. Indicators of adequacy of reserves are still in the safe zone, i.e. they point to sufficient reserves to deal with possible unforeseen shocks.
In terms of risks, the risks associated with the external environment remain, and the developments in Ukraine still pose an additional risk factor. These developments create risks of instability in the world prices of energy and grain products, and they may also have an impact on the expected economic recovery.
Latest assessments have shown that the support for the economy through the monetary easing performed so far is sufficient, in circumstances when the real sector of the economy is recovering at the projected pace, and for the time being the banks' credit support is better than estimated.
Taking into account the latest macroeconomic and market indicators, the Operational Monetary Policy Committee decided to preserve the current monetary setup and to offer CB bills at the auction in the amount that falls due (Denar 25,500 million) at an unchanged interest rate of 3.25%.
The National Bank will continue to closely monitor the future macroeconomic developments and the possible materialization of risks, and will adjust the monetary policy accordingly.