On 14 January 2020, the National Bank’s Operational Monetary Policy Committee discussed the key domestic economy indicators and the developments on both, international and domestic financial markets, in the context of the monetary policy setup.

Based on the assessment of the current economic and financial conditions, as well as on the currently present risks, the Committee assessed that there is room for further relaxation of the monetary policy, and decided to cut the policy rate by 0.25 percentage points, i.e. from 2.25% to 2.00%. The offer of CB bills on the auction to be held on 15 January 2020 is maintained at the level of Denar 25.000 million. The decision on reducing the interest rate is based on the continuous favorable movements on the foreign exchange market which resulted in faster growth of foreign reserves than expected, which indicates absence of pressures in the external sector and stable perceptions of the domestic entities. At the same time, current movements show moderate growth in domestic prices, and thus absence of price pressures.

Regarding the latest macroeconomic indicators of the domestic economy, the Committee assessed that the economic growth registered in the first three quarters of 2019, of 3.6% is in line with that forecasted for this time of year, and the available high frequency indicators for October-November are in line with the expectations for more moderate economic growth in the last quarter of the year.

When it comes to changes in consumer prices, the average annual inflation rate for the entire 2019 of 0.8% corresponds to the October forecast, i.e. it is insignificantly below the forecasted rate of 1%. Amid current inflation slightly lower than forecasted in October last year, as well as amid external input assumptions revised in divergent directions, risks to the inflation forecast for 2020 of 1.5% are currently assessed as balanced. The uncertainty about the movements of primary commodities prices on the world markets continues to be the main factor of risk to the forecast of domestic inflation for the coming period.

The latest data on the foreign reserves show their further rise, given the favorable movements on the foreign exchange market and interventions with purchase of foreign currency by the National Bank. Foreign reserves adequacy indicators show that they are still within the safe zone. According to the so far available external sector indicators, the foreign trade data for the period October-November currently point to the possibility for higher trade deficit than forecasted for the fourth quarter. The latest available data on the net purchase from currency exchange operations, as of the second 10-day period of December, point to the possibility for achieving net inflows from private transfers according to the forecasts for the fourth quarter.

In terms of movements in total deposits and total loans, the preliminary data for December show maintenance of the continuity of annual growth of both deposits and loans, whereby the performances do not point to larger deviations from the forecast.

In the period between the two Committee meetings, the liquidity of the domestic commercial banks decreased, amid combined effect of the growth of denar cash before the New Year and Christmas holidays and government denar deposits, but with further growth of denar assets on the basis of the National Bank interventions on the foreign exchange market. Namely, in December, the National Bank intervened with purchase of the excess foreign currency liquidity (in the amount of Euro 32.5 million), which was a result of the higher supply of foreign currency by natural persons and exchange offices, typical for the end of the year. The relatively favorable movements on the foreign exchange market, together with the active approach of managing foreign assets by banks were the most significant factors that enabled throughout 2019, continuously, the National Bank interventions on the foreign exchange market to be aimed at purchase of the excess euros offered by banks. In such conditions, the total purchase in 2019 reached Euro 399.65 million, which is the historically highest amount annually.

Despite the decrease in denar liquidity, banks continued to have a relatively solid liquidity position in domestic currency, which also in this analyzed period influenced the weak need for their borrowing on the interbank deposit market. Banks continued to direct excess denar assets to 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 December, there was a generally positive sentiment among the participants in the international financial markets, which was mainly influenced by the information about reaching an agreement on the “first phase” of the trade contract between the USA and China. In such circumstances, the investors’ interest was aimed at riskier financial instruments, which contributed to further growth of the prices of shares on world markets, growth of the yields on government bonds and depreciation of the US dollar. Central banks at global level continued to conduct expansive monetary policies, which was also a characteristic of the entire 2019. On the other hand, at the beginning of January 2020, the intensified geopolitical tensions in the Middle East had a temporary effect aimed at increasing the demand for safe instruments, which in turn was reflected with reduction of their yields.

Overall, at the meeting of the Committee it was concluded that the latest macroeconomic indicators are generally in line with the expectations, and the perceptions for the environment for monetary policy conduct are somewhat more favorable compared to the previous assessment. Risks are still present, whereby the National Bank will continue to carefully monitor the trends and potential risks of the environment, in order to adequately adjust the monetary policy setup.