The NBRM's 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 and the banking sector

On 14 November 2017, the NBRM's 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 and the banking sector, in the light of the monetary policy setup.

The Committee assessed that the monetary setup is appropriate and decided the CB bills auction on 15 November to be conducted under unchanged conditions, i.e. to offer CB bills in the amount of Denar 25,000 million at interest rate of 3.25%.

The Committee reviewed the latest developments in the domestic economy in the context of the recent macroeconomic forecasts, emphasizing once again that the economic fundamentals are sound, without any imbalances in the economy. However, the Committee also emphasized that there are still segments where certain risks are present and where it takes time for a sustainable improvement of the expectations and confidence of the economic agents. In such conditions of sound economic fundamentals, but still present risks, vigilance is needed regarding the changes in the monetary setup.

Analyzing the latest macroeconomic indicators, after the decline in the activity of about 1% in the first half of the year, the available high frequency indicators of the activity give different signals in the third quarter. Overall, they suggest somewhat better situation in the economy compared to the previous quarter.

October inflation data indicate continuity of the current developments, with average annual inflation rate in the first ten months of 1.2%, driven mostly by core inflation and partly by energy prices.

The number of external sector indicators is limited, and so far the available data show a moderate current account deficit.

Foreign exchange market developments are favorable, and since August, the National Bank has intervened on the foreign exchange market with a net purchase of foreign currency. Concerning the foreign reserves adequacy, all indicators remain within the safe zone.

After the monthly decrease in total deposits in September, initial monetary data for October show a solid monthly increase in total deposits in the banking system. Corporate deposits made a pronounced contribution to the positive developments in deposits, but the developments of household savings are also solid.

After the fall in September, in October, lending on the credit market continued to increase. Analyzed by sectors, lending to households continues to grow, while the credit flows to the corporate sector decreased.

In the period between the two monthly meetings of the Committee, the banks' liquidity potential increased, according to the planned flows, mainly as a result of the issue of denar liquidity conditioned by the net purchase of foreign currency by the National Bank on the foreign exchange market amid favorable developments. Namely, in October, under the influence of the seasonally lower demand for foreign currency and solid supply, banks registered a net purchase of foreign currency in transactions with customers, which enabled growth of their external liquidity. In such circumstances, the interbank foreign exchange market registered an increased supply of foreign currency, whereby the National Bank intervened with a net purchase of Euro 28.1 million from the market makers. The favorable movements on the foreign exchange market in transactions with customers continued at the beginning of November, allowing further purchase of foreign currency by the National Bank. During October, banks actively managed liquidity, and part of the excess available funds was channeled to long-term and high-yielding investment instruments. Banks compensated the short-term liquidity fluctuations through transactions on the money market, where they traded on both the interbank uncollateralized deposit market and the secondary securities market.

For the November period of reserve requirement, there are forecasts for additional increase in the banks’ denar liquidity amid positive foreign exchange market developments. The banks had an opportunity to channel the excess liquidity accumulated in the previous period to lending to the private sector, amid retained stable supply of the basic instrument.

In October, the euro area reported for solid macroeconomic indicators of economic activity in the third quarter of the year, strengthening the expectations for solid performances by the end of the year and 2018. In such circumstances and in accordance with the expectations, the European Central Bank made a decision to reduce the monthly purchase of securities within the quantitative easing program from Euro 60 to Euro 30 billion, starting from the next year. The European Central Bank announced continuation of the monetary support at least by September 2018, without indicating the end date of the program, which can mean further support to the economy through the accommodative monetary policy after September 2018. In such circumstances, there was a reduction in the yields on government securities in the euro area, the long-term segment of the yield curve, and the foreign exchange market registered a decrease in the value of the euro. In the United States, interest rates are expected to be increased at the Fed's meeting in December, leading to a significant increase in the yields in the short-term maturities on the yield curve.

In summary, at the meeting, the Committee concluded that the current economic and financial conditions, and the existing risks suggest appropriate current monetary setup. The external position, seen through the performances in the current account of the balance of payments, is generally within the expectations and shows maintenance of sound economic fundamentals.

In the period ahead, the National Bank will closely monitor the economic indicators, while the future changes in the monetary policy will greatly be conditioned by the developments in the domestic economy and the external sector.