On 14 June 2016, 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 light of the monetary policy setup.
On 14 June 2016, 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 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 22,000 million, at an unchanged interest rate of 4%.
At this meeting it was agreed that the monetary policy tightening in early May, for now, is sufficient reaction to soothe the pressures on the foreign exchange market and the banks' deposit base, which were caused by domestic non-economic factors. Recently, signs of stabilization in the expectations and the confidence of the economic agents have been evident, with the assessments for soundness of the economic fundamentals remaining positive.
The data on the economic activity point to further increase in the activity in the domestic economy, which, according to the estimated data on GDP for the first quarter, equals 2%. Nearly all activities registered positive performance. However, this pace is slower compared to the growth dynamics registered so far, as well as according to the last NBRM projections. The high frequency data for April, for the most part, indicate economic activity kept in the zone of positive growth rates. However, it should keep in mind that these estimates are based on very few available data, while domestic non-economic factors related to political developments in the country further raise the uncertainty about the performance and evaluation of the economic activity in the second quarter.
In terms of inflation, the average annual change in domestic consumer prices in April remained in the negative zone, amid lower food and energy prices. On the other hand, the core inflation continued to increase moderately. The total inflation is so far within the projections, and the risks to the projection by the end of the year remain associated with the variability of expectations about the changes in international energy and food prices.
The latest data on the foreign reserves, as of mid-June, show quarterly decrease. Major factor for the decrease in the foreign reserves during this period are the NBRM interventions on the foreign exchange market in response to increased demand for foreign currency, given the unstable political environment. From April 19 to May 23, the NBRM intervened in the foreign exchange market with a sale of Euro 129 million, which closed the gap between demand for and supply of foreign currency and maintained the exchange rate stability. In May, the National Bank measures to deal with speculations about the stability of the denar exchange rate contributed to a constant decrease in the demand for foreign currency from the natural persons, which gradually returns to a usual pre-crisis level. In such circumstances, in May the natural persons' demand for foreign currency fell by about 30% compared to the total demand in April. Since the last week of May, the exchange market has been stable, almost without need of NBRM interventions, indicating a significant stabilization of expectations and confidence of economic agents and smaller propensity for managing foreign exchange. The analysis of all foreign reserves adequacy indicators shows that they are still within safe zone.
The uncertain domestic environment reflected on banks' deposit base, which in April registered a significant monthly fall of 2.2%, almost equally distributed between corporate deposits and household deposits. Preliminary data for May show further downward trend in deposits, but much smaller compared to April, with the daily data for the second half of May and the first half of June registering a significant stabilization of the deposit base. This indicates stabilization in the perceptions of the economic agents.
In terms of the credit market, in April and May, the total loans to the private sector remained relatively stable, amid growth in household loans and fall in loans to the corporate sector. The stagnation of lending in part is probably is a reaction to the uncertain environment and the decrease in the deposit base, but in part, it is a reflection of the write-off of past due claims, according to the decision of the NBRM adopted in December 2015.
The reduced liquidity, mainly due to the National Bank interventions on the foreign exchange market, conditioned high bank demand for liquid assets, where the turnover reached the highest monthly level since July 2014. The market interest rates, beside the higher demand for liquidity, remained at a relatively stable level.
In May, stable movements on international financial markets were registered, given the lower uncertainty about the global economic growth and support by the monetary policies of the largest central banks. At the meeting of the European Central Bank it was confirmed that the interest rates would be maintained at current or lower level, while the projections for the economic growth and inflation rate in 2016 has been moderately revised upwards. Views of the FED and the favorable macroeconomic indicators led to increased expectations for the growth in interest rates in the next period, which declined with the announcement of weaker indicators of the labor market than expected.
The economic and the financial conditions, as well as the assessment of the current risks show that the current monetary setup is appropriate. Recent data suggest significant stabilization of the movements after the measures taken by the NBRM. However, the uncertainty associated with domestic political developments and global environment is still present.
The NBRM will continue to closely monitor the developments in the period ahead, and if appropriate, it will accommodate the monetary policy for successful achievement of the monetary objectives.