On 15 January 2019, the NBRM'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.

After the interest rate cut in December last year, at this meeting the Committee assessed that the monetary setup is adequate to the current economic and financial conditions, and decided to keep the interest rate on CB bills at the level of 2.5%. At the meeting, the Committee also decided to keep the supply of CB bills, for the auction to be held on 16 January 2019, at the level of Denar 25,000 million. In general, at this session, the Committee retained the previous observations on sound economic bases and stable expectations of economic agents, evident through the favorable developments on the foreign exchange market and the growth of the deposit base of banks.

The comparison of the latest macroeconomic indicators with their forecasted dynamics within the last year's October forecasting round does not indicate significant deviations in the individual segments of the economy. Data on economic activity for the third quarter of 2018 showed GDP growth of 3%, which is somewhat better than expected. The currently available high-frequency data for the period October - November 2018 suggest more favorable developments in the economy in the fourth quarter, amid rapid growth in activity in industry and the trade turnover, as well as a high growth in completed construction works. Given this, the data indicate a gradual recovery of the economy.

When it comes to changes in consumer prices, the annual inflation rate of 1.5% for the entire 2018 corresponds to the October forecast, i.e. it is insignificantly below the forecasted rate of 1.6%. Amid 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 2019 of 2% for now are considered balanced.

The latest data on the foreign reserves showed their further rise, given favorable developments on the foreign exchange market and interventions with net purchase of foreign currency by the NBRM. The growth of foreign reserves in the last quarter of 2018 is faster than expected within the October forecasts, and the analyses of adequacy indicators show that they are still maintained in the safe zone. According to the so far available external sector indicators, the foreign trade data for the period October - November 2018 indicate a possibility for realization of improved trade balance than expected. The latest available data on the net purchase from currency exchange operations, as of the first 10-day period of December, point to net inflows of private transfers in the last quarter which are within the expectations with the October forecast.

Initial monetary data for December 2018 show continuous growth in both deposits and loans. Deposit base continued to grow at accelerated monthly pace, with the largest contributors being the household deposits. On the credit market, the monthly growth also accelerates and is driven by the lending to the corporate sector. On an annual basis, the growth of deposits exceeded the annual growth forecasted for the end of 2018, while the annual growth of lending is slightly lower than forecasted.

In the period between the two meetings of the Committee, the domestic money markets did not register a more pronounced activity, in conditions of further retention of the favorable liquidity position of banks. In December, the total liquidity further increased, mainly due to the NBRM interventions on the foreign exchange market. The NBRM purchased around Euro 67 million in December, or twice more compared to the same month of the previous year. During the entire 2018, the NBRM purchased Euro 382 million, which is the historically highest purchase in the past fourteen years.

The relatively high purchase of foreign currency in December, but also during the entire 2018, was made amid favorable developments in all segments of the foreign exchange market, whereby banks in transactions with clients purchased net foreign currency, in conditions of lower net sale of foreign currency for the needs of companies and simultaneously higher supply of foreign currency in transactions with exchange offices, as a seasonal effect before the New Year and Christmas holidays.

During December last year and in the first half of January this year, banks offset

the short-term changes in denar liquidity by adjusting placements in overnight deposit facilities with the NBRM, that allow high flexibility and ensure availability of funds.

Last month, the international financial markets continued registering variable movements, with increased risk aversion by investors, which has caused demand for safe financial instruments in the euro area and the US to increase. The market sentiment was driven by the weaker macroeconomic indicators in the euro area and the downward revision of the forecasts for both the economic growth and the inflation rate by the ECB. Investors changed the expectations for the normalization dynamics of the monetary policy of the ECB during this year. Also, despite the increased expectations for resolving the trade dispute between the US and China, the risk aversion was increased by the Fed's decision, made at the December meeting, to increase its policy rate, as well as the political uncertainty in circumstances of partial closure of the operations of the US civil administration. In conditions of increased oil supply and reduced prospects for global economic growth, oil prices have reached the lowest level in the last sixteen months.

In summary, at the meeting it was concluded that since the reduction of the interest rate last month until now, no major changes in the trends of key monetary policy indicators were noticed. The latest macroeconomic indicators and assessments do not suggest significant deviations from the forecast dynamics, nor changes in the perceptions for the monetary policy environment. At the meeting it was concluded that there are still risks from both the domestic and the external environment. The NBRM will continue to closely monitor the developments in the economy, as well as the potential risks, in the context of the monetary policy setup.