On 8 May 2018, 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.
The Committee assessed that the monetary setup is appropriate and decided the CB bills auction on 9 May to be conducted under unchanged conditions, i.e. to offer CB bills in the amount of Denar 25,000 million at an interest rate of 3.00%.
The Committee reviewed the latest developments in the domestic economy in the context of the April macroeconomic forecasts, emphasizing once again 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 net foreign currency by the NBRM at the beginning of the year. The dynamics and currency structure of household savings show stable expectations and favorable perceptions.
Regarding the latest macroeconomic indicators, after the stagnation of the economy in 2017, the current available high-frequency indicators for the activity in the third quarter of 2018 generally indicate a possibility for economic growth. This statement is underpinned by industry and trade data, while construction activity continued to decrease.
April inflation data indicate continuity of the current developments, with average annual inflation rate in the four months of 1.5%, driven mostly by core inflation and food component. Since the limited number of the external sector indicators, the so far the available data point to a relatively favorable external position. Concerning the foreign reserves adequacy, all indicators remain within the safe zone.
Within the period between the two meetings of the NBRM’s Operational Monetary Policy Committee during the month, the banks’ liquidity potential decreased, which is mostly contributed by the government transactions due to higher payment of tax and non-tax revenues in the RM Budget. At the same time, on the foreign exchange market, the favorable movements from the beginning of 2018, which were characterized by significantly lower net foreign currency sale of the banks to their clients, continued in April 2018. This month, the bank clients registered higher net supply of foreign currency, as opposed to the movements characteristic for the same month of the year when the banks usually register net sale of foreign currency to their clients.
Such favorable developments on the foreign exchange market, which dominantly arouse from the increased supply of foreign exchange by companies, as well as from the relatively improved performance in the transactions with other entities, contributed towards further increase in the foreign exchange liquidity of the banks and for National Bank interventions for purchase of excess foreign exchange in the amount of Euro 27.5 million. Thus in the first four months of the year the banks have neutral position in the transactions with the clients, as opposed to the same period of the previous year, when they registered net sale of Euro 153 million, which is a result of the several times higher increase in the supply compared to the increase in the demand for reign currency by all bank clients.
After the monthly decrease in total deposits in September, initial monetary data for April show slight monthly increase in total deposits in the banking system. Positive movements in total deposits in April fully reflect the growth of household savings, while corporate deposits declined. On the credit market, the monthly credit growth continued in April, but slightly faster than in the previous month. Analyzed by sector, growth is driven by lending to households, and corporate sector loans also show slight growth.
During the analyzed period, banks have compensated a large portion of reduced denar liquid assets by reducing the placement of overnight deposit facilities with the National Bank. In addition, the banks registered intensified trade activity on the money market, as well, with part of the necessary funds being provided through repo transactions and interbank lending of uncollateralized deposits. Market interest rates registered moderate downward movement, which despite the increased demand for liquidity, is assessed as banks’ prolonged market reaction to the reduction of the interest rates on CB bills and deposit facilities with the National Bank in March.
In April, the volatility on the international financial markets declined amid soothed concerns for the trade restrictions in comparison with the previous month and increased investors’ confidence, which led to upward movement in stock prices and lower prices for safer instruments, both in the US and in the euro area. In such conditions, as well as perceptions of the still-diverging monetary policies of global central banks - the FED and the ECB, the US dollar appreciated against the euro. At the ECB meeting, it was reiterated that the quantitative easing program will continue until at least September 2018, and interest rates will remain at current levels for a longer period. On the other hand, on the FED meeting at the beginning of May the interest rate spread was maintained from 1.5% to 1.75%, as expected, but no changes were made to the long-term announcement of the monetary policy, which is in line with expectations for three increases of the interest rate this year.
Overall, at the meeting, the Committee concluded that the macroeconomic indicators and assessments are generally as expected, and the perceptions for the monetary policy environment are mainly unchanged compared to the previous assessment.
The National Bank in the following period will closely monitor all economic indicators and developments in the domestic economy, and without jeopardizing the realization of the main goal, will provide conditions for further strengthening of the banking sector support aimed at increasing economic activity in the country.