On 10 October 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
On 10 October 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 light 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. In this light, the Committee decided CB bills in the amount of Denar 25.000 million, at the level of the maturity from the September auction, at an interest rate of 3.25%, to be offered at the CB bill auction which will be held on 12 October.
Analyzing the specific economic indicators, after the deceleration of the economic activity of GDP in the second quarter, the high frequency indicators for the third quarter give different signals. Favorable movements were registered in the construction and trade, and the signals given by the surveys on the economic confidence are also favorable. On the other hand, the industrial sector developments are less favorable compared to the second quarter. However, the available high frequency data for the third quarter are limited, due to which it is difficult to create a precise assessment regarding the pace of activity in this quarter. Analyzing the projected path to the end of the year, the lower performance in the first half of the year poses downward risks to the GDP forecast of 2.5% for the entire 2017.
September inflation data suggest certain deceleration in the annual inflation rate to 1.7%, with average annual price growth in the first nine months of 1.1%. The average price growth in this period reflects primarily core inflation, and less energy prices. Food prices continue to make negative contribution to the average price growth, 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.
Initial monetary data for September 2017 show a decrease in the bank deposit base on a monthly basis, caused by the decline in corporate deposits, while household savings continued to increase, with favorable developments registered in its currency structure. At the end of September, the level of total deposits was lower than the April forecasts for the third quarter. During September, on the credit market, banks continued to provide credit support to the household sector, while the lending to the corporate sector declined, so that total loans at the end of September were somewhat lower than the expectations within the April forecast.
In the period between the two monthly meetings of the Committee, the banks' liquidity reduced, mainly under the influence of the withdrawal of liquid assets, due to government transactions, which was partially compensated by denar liquidity created through the National Bank’s purchase of foreign currency from the foreign exchange market. During this month, banks continued to actively trade in the money markets, and the excess funds on their accounts was directed to the deposit facilities with the National Bank.
As for the October period of reserve requirement, which begins on 12 October, an increase in liquidity is forecasted due to the autonomous factors, which will lead to compensation and stabilization of the banks' liquidity.
Analyzing the external sector, foreign reserves data for September show a decrease compared to the end of June, which is mainly due to the regular settlement of government liabilities on external debt. Thus, all foreign reserves adequacy indicators show that they remain in a safe zone.
The number of available external sector data for the third quarter is small and so far show developments in accordance with the expectations, and this mainly refers to trade deficit data in the period July-August and the latest available currency exchange market data. However, the restricted number of data and the volatile seasonal dynamics are a limiting factor for making more reliable conclusions about the expectations for the external sector indicators for the entire quarter.
Foreign exchange market developments are relatively favorable, and since August, the National Bank has intervened on the foreign exchange market with a net purchase of foreign currency. In September, given the higher supply of foreign currency on the interbank foreign exchange market, the National Bank intervened with a net purchase of Euro 9.0 million from market makers. Analyzing the dynamics, in the first half of the month, in circumstances of higher supply of and stable demand for foreign currency, banks purchased foreign currency in transactions with customers, which resulted in a moderate increase in their external liquidity. Consequently, in the second half of the month, banks had room for compensation of the increased demand for foreign currency by the corporate sector, mainly related to payment of dividends to foreign investors. At the same time, the increased net supply of foreign currency by non-residents increased the supply on the interbank market, and decreased the interbank rate to the level of intervention rate of the National Bank for purchase of foreign currency. The favorable movements in transactions with customers on the foreign exchange market continued at the beginning of October, which allowed further purchase of foreign currency by the National Bank, in the amount of Euro 13.5 million, as of 9 October.
In September, in global terms, in circumstances of strengthened investors' expectations for synchronized normalization of the monetary policies of the influential central banks, the capital markets registered an increase in proceeds from fixed income instruments. The foreign exchange market registered strengthening of the value of the US currency, with expectations for another increase in interest rates by the central bank by the end of the year. In the euro area, positive macroeconomic developments prevailed, but there were also a lot of information about political uncertainty after the elections in Germany and the Catalonia events at the end of the month.
In summary, at the meeting, the Committee concluded that the current economic and financial conditions, and the existing risks, suggest that the current monetary setup so far is appropriate. The external position, seen through the performances in the current account of the balance of payments, is generally within the expectations and shows preservation of sound economic fundamentals.
In the period ahead, the National Bank will closely monitor the economic indicators, and the future changes in the monetary policy will be determined by the developments in the domestic economy and the external sector.