Regular meeting of the Operational Monetary Policy Committee of the National Bank

On 12 January 2021, the National Bank Operational Monetary Policy Committee held its regular meeting and discussed the developments on the international and domestic financial markets and the indicators of the domestic economy in the context of the monetary policy setup. 

At this meeting, the Committee decided to keep the interest rate at the historically lowest level of 1.5%, whereby the monetary policy retained its relaxed character. The decline in the key interest rate in the last year, as well as the current significant reduction of the offered amount of CB bills, contributed to increasing liquidity of the banking system and supporting credit flows in the economy. Given the already performed relaxation, and amid still present risks and uncertainty, at this meeting, the Committee decided to keep the interest rate on CB bills at the current level, as appropriate to the current economic and financial conditions. At the same time, the Committee assessed that the liquidity released through the main National Bank instrument of Denar 15 billion last year is appropriate, and decided at today’s auction to offer the same amount of CB bills of Denar 10 billion.

The latest available macroeconomic indicators for the gross domestic product suggest an annual decline in the economy in the first three quarters of the year of 5.9%, which is in line with the expectations of the latest forecasts. Regarding the fourth quarter, the latest available data on the economic activity indicate more favorable movements in the domestic economy compared to the previous quarter, in conditions of target and less restrictive measures for dealing with the second wave of COVID-19, as well as gradual adjustment of the behavior and habits of entities to the new situation. Further slowdown in the annual fall was registered in industry and total trade turnover, then construction registered growth acceleration, and unfavorable trends were registered only in the turnover in catering.

The average annual inflation rate for the entire 2020 equals 1.2%, which is in line with the forecasted rate according to the latest forecast. In conditions of revisions in the external input assumptions in different directions, there is still highlighted uncertainty arising from the movement in the world prices of primary products in the next period and their impact on domestic prices, according to the uncertain economic effects of the second wave of the COVID-19 pandemic and its duration, as well as the occurrence of a mutation of the coronavirus.

Foreign reserves are still at an appropriate level and are maintained in the safe zone, at a growth pace in the last quarter that is better than expected according to the latest forecasts. Hence, last year, the foreign reserves grew by around Euro 100 million, versus the expected fall. Regarding the available external sector data, the latest data on the currency exchange market and on the foreign trade point to the possibility for performances in private transfers and in the trade deficit within the expectations for the last quarter.

Regarding the movements in total deposits and total loans, the initial data as of December show their further solid annual growth, higher than forecasted for deposits, while in loans, the performances are mainly within the expectations according to the forecast.

In the period from the last, December, meeting of the Committee onwards, the liquidity of the banking system in domestic currency registered a more significant increase, conditioned mainly by the realization of part of the fourth package of measures for revitalization of the economy in conditions of COVID-19. In such circumstances, banks had a very low and occasional need to trade in short-term denar liquid assets on the money markets. The foreign exchange market also registered favorable developments, visible primarily through the growth of the net supply of foreign currency by natural persons on the currency and the foreign exchange markets. These market performances were accompanied by a further increase in the banks’ foreign currency liquidity, due to which the National Bank for the first time in 2020 intervened by purchasing foreign currencies. The favorable developments on the foreign exchange market continue in the first half of January, given the net purchase of foreign currency by banks.

In December, starting the process of vaccination against the coronavirus in several countries, reaching an agreement for the Brexit between the United Kingdom and the EU and the expectations for further support to the economic growth by policy makers created optimistic perceptions in investors about the perspectives for the economic recovery at global level. The optimism on the international financial markets contributed to an increased interest for investing in higher yielding financial instruments, due to which the growth of global stock exchange indices continued, and the value of the US dollar decreased. The prices of government bonds registered no significant changes during the month, i.e. remained at relatively high levels.

Overall, at the meeting of the Committee it was concluded that the flows have thus far been stable and the latest macroeconomic indicators are generally in line with the expectations, with unchanged perceptions for monetary environment compared to the previous assessment. However, the uncertainty and risks from the pandemic caused by COVID-19 persist, both globally and within the domestic economy. In the period ahead, the National Bank will carefully monitor the trends and potential risks, in order to adequately adjust the monetary setup, if necessary.