On 9 July 2019, the National Bank’s Operational Monetary Policy Committee held a regular meeting and discussed the key domestic economy indicators and the developments on the international and domestic financial markets in the context of the monetary policy setup.

The Committee assessed that the monetary setup is adequate to the current economic and financial conditions, and decided to maintain the CB bill interest rate at 2.25%. The Committee also decided to offer the same amount of CB bills i.e. Denar 25,000 million at the auction on 10 July 2019.

They also discussed the latest domestic economy developments in the context of the latest macroeconomic forecasts. According to the Committee, the economic fundamentals remain sound, without any economic non-equilibrium. The lack of non-equilibrium is evident through low and stable inflation and favorable external position, a context which is conducive to favorable movements on the foreign exchange market and interventions for purchasing foreign currency by the National Bank at the beginning of the year. The dynamics and currency structure of household savings show stable expectations and favorable perceptions.

Regarding the latest macroeconomic indicators, the currently available high frequency data for the period April-May mainly point to further favorable economic movements, visible through the accelerated growth of trade and the further growth of industry. These data, as well as the growth rate of the economic activity of 4.1% in the first quarter of this year, which is close to the forecast, correspond with the expectations for solid economic growth this year.

The average annual inflation for the first half of this year was 1.2%, with expectations for an inflation rate of 1.5% for the entire 2019. For now, risks to the inflation forecast for this year have been assessed as balanced.

Concerning the external sector indicators, foreign trade performances for April-May 2019 suggest a possibility of achieving a slightly higher trade deficit than expected for the second quarter. Currency exchange market data as of the second 10-day period of June point to net inflows of private transfers as expected for the second quarter of this year. At the end of June, the foreign reserves were higher compared to the end of 2018, with all adequacy ratios being in the safe zone.

Concerning the monetary developments, after the slight decrease in May, the preliminary data for June show a monthly growth in total deposits, which is almost equally due to the increase in the deposits of all sectors (households, corporations and other sectors). On the credit market, the monthly credit growth continued in June, mainly aimed towards the household sector, amid growth of the lending to the corporate sector. Shifts in deposits and loans do not show larger deviations compared to the expectations according to the latest macroeconomic forecasts.

In the period between the two Committee meetings, the banks’ high liquidity continued with the upward trend, due to which the banks had a moderate need for borrowing in the interbank deposit market. They continued to direct excess available funds to deposit facilities with the National Bank, which provide high flexibility and access to funds for smooth domestic lending.

On the foreign exchange market, in June, the net sale of foreign currency was intensified under the influence of seasonal factors, which contributed to an increased demand for foreign currency by domestic companies, related to the regular operations, but also due to repayments of dividends to foreign investors. The banks fully met the higher demand from their own funds, and directed the surplus foreign liquidity, which resulted from the higher lending with FX clause and the flexible foreign assets and liabilities management, to the interbank foreign exchange market. In such circumstances, in June, the National Bank purchased Euro 19 million from the market makers, whereby also this month the central bank was present on the foreign exchange market only by purchasing foreign currency. The interventions on the foreign exchange market continued at the beginning of July, whereby cumulatively from the beginning of the year to 9 July, the National Bank purchased Euro 102 million.

At the international level, there are positive signs of reduction of the uncertainty related to the global trade relations, after the G-20 meeting in late June, the United States and China reached an agreement for resumption of the negotiations for trade relations between the two countries. However, the global macroeconomic situation continues to show signs of weakness, whereby the high frequency data indicate a slowdown of the economic activity in the euro area in the second quarter of this year. In circumstances of deteriorated outlook for economic activity, in June, the central banks of the euro area and the United States signaled a willingness to take measures for encouraging the economies. Consequently, in line with the market expectations for further monetary easing by the ECB, as well as for reduction of interest rates by the Fed, the international financial markets registered a greater interest in safe placements, primarily in government securities, leading to a reduction in their yields, as well as in gold, which in turn caused growth in its price.

Overall, in the meeting, the Committee concluded that the latest macroeconomic indicators and assessments indicate certain deviations in terms of the forecasted dynamics, while the perceptions for the monetary policy environment are mainly unchanged compared to the previous assessment. Thus, the Committee again underlined the unfavorable risks arising from the external environment. In the period head, the National Bank will carefully monitor the trends and potential risks in the context of the monetary policy setup.