On 11 August 2015, 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 latest macroeconomic indicators in the light of the monetary policy setup.
On 11 August 2015, 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 latest macroeconomic indicators in the light of the monetary policy setup.
The assessment of the economic and financial conditions showed that the current monetary policy setup is adequate and the Operational Monetary Policy Committee decided the CB bills offered at the auction to be in the amount of Denar 25,500 million, at an unchanged interest rate of 3.25%.
The latest indicators suggest that the economic activity continues to grow at a solid pace, supported in part by the lending of domestic banks. Economic recovery takes place in the absence of price pressures or pressures in the external sector. Foreign reserves are still being maintained at an appropriate level, sufficient to cope with possible unforeseen shocks in the future. The risks for the domestic economy, related to the domestic political developments and the economic and political developments in Greece have declined recently, and their effects continue to be assessed as limited and mainly realized through the expectations channel. However, although reduced, there is still uncertainty in the global environment. Against such background, leaving the zone of accommodative monetary policy in the next period will depend on the changes in the external position of the economy and the effects on foreign reserves.
The latest macroeconomic indicators do not point to major changes in the monetary policy setup. After the GDP growth in the first quarter, which corresponded to the projections, indicators of economic activity in the second quarter point to continuation of these trends. Data on industrial production as of June showed growth of this sector, whereby the decline registered in the April - May period was completely offset. The latest data on construction and trade show better performances compared to the first quarter. All these indicators point to an economic growth in the second quarter, which would not deviate significantly from the projection. However, there are still unfavorable risks to the growth in the second half of the year, due to potential prolonged effects of domestic events and developments in the external environment. The general price level in July fell on a monthly and annual basis, primarily due to the lower prices of the food component. On average, in the first seven months of the year, the general price level in the domestic economy shrank by 0.3% on an annual basis. On the other hand, the growth of core inflation accelerated, confirming the observation for reduced risks from further decline in prices. So far, inflation is estimated to be within the projection. Recent assessments of external assumptions compared to the April projections, indicate expectations of slightly lower world prices of energy and food products. Frequent changes in the expectations about the prices of primary products indicate significant uncertainty about the future movement of these products and high possibility of sudden changes in these categories.
According to the latest available data for the third quarter of 2015, foreign reserves declined. Analyzing the factors of change, the decline in reserves during this period was due primarily to the regular settlement of external liabilities by the government, and partly to the net sales of foreign currency on the foreign exchange market by the NBRM. Namely, in early July, amid accumulation of foreign assets by the banks, the National Bank intervened with net selling of foreign currency. It should be stressed, however, that at the end of the month, the start of the season of high inflows of foreign currency and relatively good foreign exchange position of banks, changed the direction of the interventions of the National Bank with the market-makers towards purchasing, which continues also in August. The movements on the foreign exchange market since the beginning of the year until July have improved on an annual basis, in circumstances of higher supply of foreign currency on the basis of exports of the new production facilities in the free economic zones and outside of them, foreign exchange inflows associated with the implementation of the capital infrastructure projects and reduced demand for foreign currency for import of energy. Observing the external sector indicators, the only available data for the third quarter data are the ones on the net purchase from currency exchange operations as of the second ten-day period of July, which point to a significant improvement of the situation on the currency exchange market and for now indicate that the private transfers move within the projected level. The analysis of foreign reserves adequacy indicators shows that they continue to move within a safe zone.
Liquidity of banks under the influence of autonomous factors declined in July, mainly due to the seasonal growth of currency in circulation and the interventions of the National Bank on the foreign exchange market. That lowered the interest of the banks in monetary instruments and increased the trading activity on the money markets.
Regarding the credit market, the initial data for July show a further increase in the total loans to the private sector, with more moderate dynamics compared to the previous period, which is not uncommon for this time of the year. The annual growth rate of total loans in July was 9%, which is within the projection for the third quarter of 9.8%. In terms of the deposit potential, preliminary data as of July show its decline, resulting from the fall in the deposits of the corporate sector. On the other hand, after the two-month decline, in July household deposits increased, largely as a result of the savings in domestic currency. These developments signal a gradual depletion of the adverse effects on the public confidence due to the increased uncertainty regarding the domestic and external environment. However, total deposits as of July are lower than projected, so at the end of July, total deposits increased by 7.4% on an annual basis, while the projection for the end of the third quarter envisages growth of 9.5% annually.
In July, participants in the international financial markets were focused on the events in Greece and in China, as well as on the beginning of the normalization of the monetary policy in the USA. Uncertainty in the markets was in significant part interrupted by the agreement reached between the Greek government and international creditors for the necessary reforms in the country, which created the basis for starting the negotiations for a third bailout package. On the other hand, the concerns of market participants about the developments in China are associated with the risks for growth of the Chinese economy in the next period and the effects on global trade flows. Given the relatively favorable economic performance in the USA, Fed is still expected to raise the interest rates in late 2015. As regards the euro area, macroeconomic indicators point to a further slow growth in the economic activity, which underlines the need for full implementation of the program for quantitative easing by the European Central Bank.
Generally, in the period since the latest April projections, due to domestic and external risks, the policy conditions were uncertain and unstable, but in the recent period the uncertainty, however, has reduced. For now, the latest macroeconomic indicators and assessments do not point to major changes in the environment for conducting the monetary policy. The fundamentals of the economy remain solid. Foreign reserves adequacy indicators remain within the safe zone. Economic growth is solid and there are no price pressures. Credit market developments have been generally favorable for a longer period of time, suggesting relatively efficient transmission of the monetary measures undertaken so far on the credit activity and more stable expectations of domestic banks. The latest data on the currency exchange market and the deposit market show stabilization of expectations and so far confirm the conclusion about limited and temporary effects of domestic political developments and developments in Greece on the domestic economy.
However there is still an ongoing uncertainty, so the NBRM will continue to monitor closely the future macroeconomic developments and the possible materialization of risks and will adjust the monetary policy accordingly.