NBRM's Operational Monetary Policy Committee held its regular meeting

On 14 March 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 in the light of the monetary policy setup. 

After three consecutive interest rate cuts, as a reflection of the constant stabilization of the expectations of economic agents and the continuous depletion of the effects of the political crisis, at this session of the Committee it was decided the interest rate on CB bills to remain unchanged. In conditions of increased liquidity in the banking system, the Committee decided to increase the supply of CB bills to Denar 30,000 million, i.e. by Denar 5,000 million more than the level of past due CB bills (Denar 25.000 million). CB bill interest rate is 3.25%, as it was at the previous auction.

Signs of stabilization remain present in two points where the political crisis hit the most - household savings and propensity for managing foreign currency. Preliminary February data indicate further growth of household savings in the banking system, whereby they increase for nine consecutive months. Favorable developments were maintained on the foreign exchange market, whereby in the first two months of the year, cumulatively, the NBRM intervened with net purchase of foreign currency. Foreign reserves remain at an adequate level. Favorable developments take place amid positive performance and estimates for stability of economic fundamentals.

Analyzing economic activity, published data on estimated GDP for the fourth quarter show economic growth, but slightly stronger compared to the previous quarter (2.4% versus 2%, respectively). Real GDP growth for the entire 2016 was 2.4% and hardly deviates from the NBRM forecast of 2.3% for 2016. For the first quarter of the year, the number of available high-frequency indicators is limited and it is too early for reliable conclusions. 

February data on the movement of prices in the domestic economy show annual inflation growth of 0.2%, which is slightly lower price growth than expected. However, the upward corrections of the expected movement for 2017 in the input assumptions on import prices indicate potential upward risks to the inflation forecast in 2017, due to factors on the supply side. 

In February, for the fifth consecutive month, the increase in the liquidity in the banking system continued, which is due to regular government transactions, as well as the National Bank interventions on the foreign exchange market for net purchase of foreign currency. Namely, in February, the foreign exchange market registered usual seasonal trends in supply and demand from customers of commercial banks, whereby the net sale of foreign currency realized by banks was at last year's level. However, given the solid foreign exchange liquidity toward the middle of the month, the interbank market registered excess supply of foreign currency, which caused purchase of foreign currency of the National Bank in transactions with market makers.  

In conditions of further growth of the excess denar liquidity, banks again increased the amount of funds placed in deposit facilities with the National Bank. Their balance has reached a high level, i.e. 43% of the funds placed in the basic instrument for monetary regulation. The growth of the banks' potential liquidity, which is currently being directed to deposit facilities with the National Bank, is taking place in circumstances of reduced credit demand in the last period, which is a result of the uncertainty related to the political crisis. In such circumstances, and because banks do not have opportunities to invest in other domestic long-term financial instruments, the Committee concluded to withdraw part of these funds, which receive character of structural excess liquidity in the banking system. 

Further stabilization of economic agents' expectations is also evident through changes in household deposits in the banking system. Preliminary data for February 2017 show further growth of household savings, for the ninth consecutive month. However, the total deposit base in February again recorded a monthly decline, as a result of the reduction of corporate deposits. Such performances led to a slowdown in the annual growth pace of deposits, however the level of deposits was higher than expected. 

In terms of lending activity, preliminary data as of February show ongoing annual growth of loans and keeping the trend of more pronounced lending to the household sector. Recent data on lending activity point to weaker performance than forecasted for the first quarter of 2017, according to the October forecast. 

Data on foreign reserves in February, compared to the end of 2016, show a decline, largely due to temporary factors. All foreign reserves adequacy indicators show that they remain in a safe zone. Analyzing external sector indicators, for the beginning of the year, there are available data on the currency exchange market as of the second decade of February, indicating net inflows of private transfers that are close in terms of expectations. Also, the latest available data on foreign trade for January do not point to performances different than forecasted. However, the short period and the volatile seasonal dynamics are limiting factor for making more reliable conclusions than expected for the entire quarter.

The international financial markets have strengthened market expectations for gradual normalization of the monetary conditions by the globally influential central banks, in response to the more certain upward price movements and solid economic performance, both in the US and in the euro area. At the ECB meeting, at the beginning of March, the current monetary policy setup was kept, but the lower deflationary risks were considered, which contributed to moderate growth of the yields of government bonds, in expectation of the beginning of a cycle of increasing interest rates by the end of the year. In the US, market participants expect that the central bank will raise interest rates at the meeting on 15 March and additionally, in July and December, which is in line with the macroeconomic performances and the favorable labor market conditions.

The Committee concluded that the assessments for stable economic fundamentals remain positive. Risks arising from the domestic political developments are still present and pronounced. At the same time, the risks arising from the global environment are again in the focus. 

The NBRM will closely monitor the developments in the coming period, while the future changes to the monetary policy will largely depend on the further stabilization of the domestic political environment.