On 11 November 2014, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the developments on the international and domestic financial markets
On 11 November 2014, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the developments on the international and domestic financial markets, the latest macroeconomic projections and the indicators for the domestic economy 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 it was decided the CB bills offered at the auction to be in the amount that falls due (Denar 25,500 million), at an unchanged interest rate of 3.25%.
The economy has still been recovering at a solid pace, in part supported by the lending of the domestic banks. Economic recovery takes place in the absence of price pressures. These developments indicate that there is a suitable environment for a sustained recovery of the private sector, and it was again assessed that the current support of the local economy through the monetary policy measures is sufficient. Leaving the zone of accommodative monetary policy in the period ahead will depend on the changes in the external position of the economy and the effects on foreign reserves.
The data on the economic activity for the second quarter reinforced the expectations for a solid recovery of the domestic economy, with achieved real GDP growth of 4.3%. The latest high frequency indicators for the third quarter of 2014 point to continuation of these favorable trends, with divergent movements in the key sectors. In September and August, industry and trade registered rapid annual growth, respectively, contrary to the value of completed construction works which plunged, leading to growth slowdown. The assessments still show that the economic growth will not cause major imbalances in the economy.
The latest data on inflation in October 2014 point to a small monthly increase in the general price level of 0.2%. On annual and cumulative basis, inflation registered negative rates of 0.4% and 0.3%, respectively, mainly due to the lower prices in the food component and oil prices. Core inflation has been in the zone of negative annual changes for the second month in a row. Such developments pointed to an inflation that is lower than that expected with the April projection. The latest expectations for import prices also indicate lower than expected inflationary pressures. Lower initial conditions and revisions of the external input assumptions point to lower than projected inflation for 2014. Risks to the inflation movement in the next period primarily result from the risks related to the global growth and the movement in the prices of primary products on the world market.
After the high accumulation of foreign reserves in the third quarter, largely due to the government external borrowing, in October, foreign reserves registered a small monthly decline. This change in the foreign reserves is within the expectations, and foreign reserves adequacy indicators further indicate a sufficient level of foreign reserves to cope with possible, unforeseen shocks.
Preliminary data for October point to continuation of the favorable trends in the lending activity, whose annual growth accelerated, reaching 9.7%. In October, an increase, although moderate, was registered also in deposits, whereby they went up by 8.5% on an annual basis. Movements in monetary and credit aggregates are more favorable than expected in the April projection. Developments in the credit market signal more stable expectations and knock-on effects of the monetary loosening on lending. However, given the uncertain economic environment, the downward risks concerning the lending to the private sector in the forthcoming period persisted.
Liquidity of banks grew under the influence of autonomous factors, wherefore banks maintained their high interest in placing funds in short-term deposits with the National Bank. Increased activity was registered on the money markets, where market participants traded unbacked deposits, but also securities. Developments on the foreign exchange market were influenced by the common seasonal factors.
Macroeconomic indicators for the United States in October confirmed that the economy is on a solid path of recovery. Against this backdrop, according to the announcements, the Fed decided to end the third round of the quantitative easing bond-buying program. On the other hand, the macro-economic data for the euro zone confirm the perception of an uncertain economic outlook. However, the results of the assessment of the asset quality of the banks in the euro zone have a positive market impact.
The latest NBRM's assessments do not point to major changes in the environment for conducting monetary policy. The foreign reserves adequacy indicators are expected to remain in the safe zone. Moreover, given the government borrowing on the international capital market, which was not incorporated in the last projections, adequacy ratios for 2014 will be better than expected. There are no price pressures, the economic growth is solid, and the credit market movements suggest positive developments in the credit market.
Under such favorable economic conditions, in the period ahead, the NBRM will be mainly focused on monitoring the realization of the projected movement of foreign reserves and foreign exchange market developments and will adjust the monetary policy accordingly. As before, the risks to the baseline macroeconomic scenario are mainly of external nature and are associated with possible changes in the pace of recovery of the global economic growth and the rise in world food and energy prices. Weaker than expected performances in the euro zone highlight the risks regarding the pace of global recovery. The effects of the events related to the conflict in Ukraine, floods in the region, and the geopolitical tensions in Iraq, continue to be risk factors. The risks of these developments could materialize through unstable and difficult to predict prices of fuel and cereal products, and could affect the expected economic recovery.
The NBRM will continue to monitor closely the future macroeconomic developments and the possible materialization of risks and will adjust the monetary policy accordingly.