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
On 8 August 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 context of the monetary policy setup.
At the meeting, the Committee assessed the existing monetary setup as appropriate to the current economic conditions. The Committee concluded that most indicators important for the monetary policy do not deviate significantly from the expectations, yet there are points where certain vigilance is required.
Taking into account the changes in the banks' liquidity potential in the July reserve requirement period, the Committee decided to adjust the amount of CB bills. In this light, the CB bill auction that will be held on 9 August will offer CB bills in the amount of Denar 25,000 million, which is by Denar 2,361 million less compared to the due amount.
In such conditions, surrounded by uncertainty and risks, the CB bills interest rate remained unchanged at 3.25%.
This creates conditions for compensating the changes in the banks' liquidity potential, and for maintaining liquid assets in the deposit facilities with the National Bank, which can be mobilized effectively for further credit support to the private sector.
Analyzing the specific economic indicators, after the stagnation of the economic activity in the first quarter, the high frequency indicators for the second quarter show economic improvement. This conclusion is supported by the growth of industrial output, after its decline in the first quarter, the slowdown in the decline in construction activity, and the acceleration of the growth in trade. However, the available high frequency data for the second quarter are limited, which makes it difficult to create a precise assessment of the business dynamics in this quarter. Analyzing the projected path to the end of the year, lower performances in the first quarter pose downward risks to the GDP forecast of 2.5% for the entire 2017.
July inflation data suggest moderate deceleration of the annual inflation rate to 1.2%, with average annual price growth in the first seven months of 0.9%. These performances are primarily due to core inflation, and less to energy prices. Food prices continue to make negative contribution to the average price change, which is gradually declining. Inflation is mainly within the forecasts, and the input assumptions expectations for the import prices of primary commodities are mainly downward, yet extremely volatile. In such conditions, risks surrounding the average inflation forecast for 2017 (1.3%) are assessed as balanced.
In July, the banks' liquidity potential in the domestic markets continued to decline, mainly due to seasonal factors related to the increased demand for denar cash in the period of summer vacations. Banks compensated the required liquidity by reducing the placements in short-term monetary instruments with the National Bank, and a significant part was offset by trading on the money market. In July, banks registered a relatively intensive trading on the market of interbank deposits with a maturity up to one week, and additionally, provided part of the required liquidity through securities trading on the secondary market.
Final monetary data as of June 2017 show increased total deposits on a monthly basis (0.8%), despite their decrease over the previous five months. The monthly growth almost entirely reflects the increase in household deposits, with moderate contribution of the corporate deposits. Total deposits grew by 7.6% annually, which is still below the forecasts for the second quarter, but this gap gradually narrowed during the quarter. In June, the credit activity continued to grow at a steady pace, amid growth of credit support to both the corporate sector and the households. The annual credit growth at the end of June was 5.8% (when controlled for the effect of regulatory changes) and is above the expected one for the second quarter of 2017.
Foreign exchange market developments in July also had a usual seasonal dynamics, marked by increased supply of foreign currency from exchange offices, which ensured fulfillment of the demand for foreign currency from other clients. The increased supply of foreign currency from the currency exchange market continued in early August, allowing growth of banks' foreign assets and higher supply on the interbank market. In such circumstances, the National Bank intervened by purchasing the excess foreign currency from the market makers.
Foreign reserves generally move along the expected path, and their reduction in July reflects the regular settlement of the government debt. Thus, particularly important are the currency market developments that are stable, seasonal and without pressures. Foreign reserves indicators remained adequate.
Regarding the balance of payments, April and May data suggest improved performances in the current and the financial transactions compared to the April forecast. Foreign trade statistics confirm this conclusion, and show somewhat lower trade deficit compared to the expected one in the second quarter of 2017.
On the international markets in July, the political uncertainties in the United States related to the implementation of the reforms of the President Trump's administration, as well as to the foreign policy relations were a significant generator of the US dollar's depreciation against the euro. On the other hand, the pronounced reactions of the markets to the ECB's positions in relation to the monetary policy setup acted in that direction, in line with the positive perceptions of the economy in the euro-area.
In summary, at the meeting, the Committee concluded that the current economic and financial conditions and the existing risks suggest that so far the current monetary setup is appropriate. The external position, seen through the foreign reserves performances is within the expectations and shows maintenance of sound economic fundamentals. This is also confirmed by credit flow data, while savings performances in June provide favorable signals and gradual approximation to the forecasts.
In the period ahead, the National Bank will closely monitor all economic indicators and developments in the domestic economy, while the future changes in the monetary policy will greatly be conditioned by the developments in the domestic economy and the external sector.