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

On 14 May 2019, the National Bank 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 context of the monetary policy setup.

After the policy rate cut in March, 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 decided to offer the same amount of CB bills i.e. Denar 25,000 million at the auction to be held on 15 May 2019.

The Committee reviewed the latest developments in the domestic economy in the context of the recent macroeconomic forecasts, underlining that the economic fundamentals are sound, without any imbalances in the economy. The absence of imbalances is evident through stable inflation and favorable external position, a context conducive to favorable movements in the foreign exchange market and purchase of 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.

Analyzing the latest macroeconomic indicators, after the relatively solid economic growth in 2018, the available high frequency indicators of economic activity in the first quarter of 2019 point to further favorable shifts in the economy, visible through the accelerated growth of industry and trade, amid continuous, yet more moderate construction growth.

The average annual inflation in the first four months was 1.4%, with expectations for an inflation rate of 1.5% for the entire 2019. For now, risks to the inflation forecast for 2019 have been assessed as balanced.

The number of external sector indicators is limited, yet for the time being, the available data point to a relatively favorable external position. All foreign reserves adequacy ratios remain within the safe zone.

Initial monetary developments data for April has shown a solid monthly increase in total deposits, which in part arises from the growth of household saving, and partially reflects the growth of corporate deposits. On the credit market, the monthly credit growth continued in April, given the growth of lending to households and the corporate sector.

In the period between the two Committee meetings, there was a relatively small need for the banks to borrow on the interbank deposit market given the further increase in denar liquidity of the banking system, which continued to be directed towards the deposit facilities with the National Bank. This allowed for high flexibility and availability of funds for smooth lending to domestic entities.

The growth of liquid assets in the banking system in this period, despite the seasonally higher demand for denar cash, was attributed to the liquidity effect of the government transactions and the National Bank purchase of Euro 29 million. The National Bank purchased relatively high amount of foreign currency given the seasonally increased supply of foreign currency on the currency exchange market before the Easter holidays and lower monthly net demand for foreign currency liquidity of the companies.

Unlike the previous month, in April, the international markets demonstrated risk-taking behavior. Globally, economic performance was better than expected, thus decreasing the prices of safe instruments, i.e. increasing their growth yields. The positive market surprise included higher than expected US economic growth, continued growth of the Chinese economy, and moderately higher GDP growth rate and favorable expectations for the euro area. The ECB has maintained its current monetary policy setup, considering the risks to the economic growth. The Fed has kept the target level of interest rate spread unchanged, demonstrating a neutral monetary policy. On the other hand, in early May, risk aversion increased due to the heightened trade tensions that began with the increase in US customs tariffs on China’s goods.

Overall, the Committee concluded that after the policy rate cut in March, the latest macroeconomic indicators and assessments are mainly as expected and the perceptions for the monetary policy environment are mainly unchanged. Nevertheless, the Committee again underlined the unfavorable risks arising from the external environment, particularly the uncertainty caused by the growing trade tensions. In the period head, the National Bank will continue to carefully monitor the trends and potential risks in the context of the monetary policy setup.