On May 13,2014, the Operational Monetary Policy Committee of the NBRM held its regular meeting, at which it discussed the situation in the banking system, the developments on the international and domestic financial markets and the latest macroeconomic projections and indicators of the domestic economy in the context of monetary policy setup
On May 13,2014, the Operational Monetary Policy Committee of the NBRM held its regular meeting, at which it discussed the situation in the banking system, the developments on the international and domestic financial markets and the latest macroeconomic projections and indicators of the domestic economy in the context of monetary policy setup.
The Operational Monetary Policy Committee finds the current monetary setup appropriate, thus deciding to preserve the current monetary setup and offer CB bills at the auction at the level of due amount (Denar 25,500 million), with unchanged interest rate at a level of 3.25%.
It was estimated that in the economy there are preconditions for a sustainable recovery of the private sector, i.e. there is no need of additional monetary stimulus. Hence, it is assessed that the support to the domestic economy provided so far through the taken monetary measures is sufficient. The exit from the zone of accommodative monetary policy in the following period will depend on the changes in the external position of the economy and the effects on the foreign reserves.
The performances in the real sector in 2013 matched the October projection, with the indicators of activity in the first quarter pointing to a continuation of the favorable trends. In addition, further presence of the factors that acted stimulating on the growth so far was also assessed. This primarily relates to the improvement of the global environment, the larger use of the potential of the foreign export capacities, the fiscal incentives on investments and the gradual recovery of the consumption.
In such circumstances, as assessed, the economic recovery will continue in the following period, as well, registering a dynamics similar to the estimations given in the October projections. Despite the expectations for further recovery of the domestic economy, according to the estimations, the growth will not be strong enough to cause major imbalance in the economy, such as inflationary pressures and significant deterioration of the external position.
The new assessments indicate lower inflation rate in 2014, compared to October projection. These changes are reflection of the lower performance with the inflation at the end of 2013 and at the beginning of 2014, and the changes in the external assumptions. The risks related to the inflation projections for the current year are estimated as mostly downward, although the evident unpredictability of the effects of the climate factors and the geopolitical turmoil create uncertainty about the prices of primary commodities, with potential transmission effects on the domestic prices.
The latest available data and assumptions for the external sector match the October estimations for widened current account deficit in the following period, which is mainly caused by major import pressures emanating from the increase in the import-dependent export and investments. The estimations for the forthcoming period further indicate sufficient capital inflows to finance the deficit and maintain adequate level of foreign reserves.
The developments on the credit market registered in 2013 were better than expected, given further maintenance of favorable trends also from the beginning of 2014, which can indicate gradual materialization of the effects of the monetary relaxation so far on the lending activity and the reduced risk aversion by domestic banks. In such conditions, and assessments for generally better economic environment in the following period, expectations for deposit growth and improved credit demand, the latest estimations, as well, suggest accelerated credit growth in the next period.
Generally, the latest assessments of the NBRM do not indicate major changes in the environment for monetary policy conduct. It is expected that the foreign reserves adequacy indicators will remain in safe zone. The inflation slows significantly, and its dynamics is due to factors on the supply side. On the other hand, the new assessments confirm the expectations for a gradual strengthening of the economic growth, while the realized and assessed changes on the credit market suggest possibility for a gradual lessening of the downward risks related to the lending activity dynamics.
The risks to the basic macroeconomic scenario, as before, are mainly of external nature, and related to the possible changes in the recovery dynamics of the global economic growth. Additional risk factors now are also the events related to the conflict between Russia and Ukraine. The risks of these developments can materialize in form of instability of the world prices of energy and cereals, as well as it can have an impact on the expected economic recovery, which imposes a need of constant monitoring of the events.
Globally, at the end of April, the FED decided to reduce the monthly purchase of securities by additional US Dollar 10 billion, so the decrease in the monthly purchase, which was announced in December 2013, continued. On the other hand, an increasing number of indicators of the economy in the Euro area suggest that the recovery has become more sustainable as a result of the increased domestic demand, in the circumstances of improved financial conditions. Despite the monthly increase in inflation in the Euro area, it is, however, at a lower level than expected, but not significantly lower to endanger the inflation expectations on a medium term. Accordingly, at the meeting held in May, the ECB decided to maintain the interest rates at the same level.
In the domestic economy, the liquidity of the banks in April increased under the influence of autonomous factors, which caused a moderate rise in the stock of the short-term deposit facility with the National Bank. During the reserve requirement period, the banks were actively trading on the Money Market, with repo transactions also being realized on the secondary market. On the foreign exchange market, the movements were stable under the influence of the common seasonal factors.
The NBRM will continue to closely monitor the future macroeconomic developments and the possible materialization of the risks and it will adjust the monetary policy accordingly.