Yesterday, the National Bank’s Operational Monetary Policy Committee discussed the key domestic economic indicators and the developments on both international and domestic financial markets in the context of the monetary policy setup.
After the policy rate cut last month, the Committee assessed that the current monetary policy setup is adequate, and decided to keep the CB bills rate at 2%. The Committee decided to maintain the amount of Denar 25.000 million of CB bills to be offered at the auction on 12 February 2020.
The comparison of the latest domestic macroeconomic indicators with their dynamics forecasted in October does not show major deviations. The economic growth of 3.6% in the first three quarters of 2019 is in line with the forecasts for this time of the year, with expectations for moderate economic growth in the last quarter as seen through the available high frequency indicators.
Inflation expectations in 2019 did not deviate significantly from the October forecast. In the absence of data on the movement of domestic prices in the first month of 2020, and amid mostly downward corrections of the expected future import price movements, currently the risks to the inflation forecast for 2020 of 1.5% are assessed as balanced. The uncertainty about the expected movements of the world primary commodity prices remains.
The foreign reserves performances in 2019 and the first month of 2020 are better than expected and the level of foreign reserves remains in the safe zone. According to the available external sector indicators, the foreign trade data for the last quarter point to higher than forecasted trade deficit. The data on net purchase from currency exchange operations, as of the second 10-day period of January, are insufficient to draw conclusions on net inflows from private transfers for the first quarter of 2020.
Observing the total deposits and total loans, the preliminary data for January show further growth of both deposits and loans, while performances do not point to larger deviations from the forecast.
In the period between the two Committee meetings, liquidity of the domestic commercial banks increased which in turn decreased the demand for denar cash, typical for the period after the New Year and Christmas holidays. In January, banks sold high amount of foreign currencies to meet the needs of their clients. Besides the seasonal factors, these movements resulted from the greater foreign currency demand by companies to settle their external liabilities. Banks managed to meet their clients’ needs for foreign currencies with their foreign currency liquidity. In such circumstances, unlike the previous month when the National Bank purchased the excess foreign currency liquidity, this was not the case in January 2020.
In the period under observation, banks did not have a need to borrow on the interbank deposit market, due to the relatively high liquidity position in domestic currency. They continued to invest excess denar assets in the deposit facilities with the National Bank, which provide high flexibility and availability of funds for smooth lending to domestic entities and other types of investments.
In early January, once the trade relations between the United States and China improved with the signing of the first phase of the trade deal, market participants had positive expectations for the economic developments and hence, the international financial markets. In the second half of January, their expectations reversed due to the increased downward risks to the global economic growth with the spread of coronavirus from China. In order to protect the investment value, investors responded by increasing their investments in safer financial instruments which increased the government securities prices and lowered the yields, led to appreciation of the US dollar and rise in gold price. In January, the central banks of developed economies maintained the current monetary policy setup, supporting the economic activity.
To sum up, the Committee concluded that the latest macroeconomic indicators are generally as expected and the perceptions for the monetary policy environment are the same as in the previous assessment. Risks are still present. The National Bank will continue to carefully monitor the trends and potential risks, in order to adequately adjust the monetary policy setup.