On 14 October, the Operational Monetary Policy Committee of the NBRM held its regular monthly meeting and discussed the situation in the banking system, the developments on the international and domestic financial markets and the latest economic indicators, in the context of the monetary policy setup
Press release of the NBRM
On 14 October, the Operational Monetary Policy Committee of the NBRM held its regular monthly meeting and discussed the situation in the banking system, the developments on the international and domestic financial markets and the latest economic indicators, in the context of the monetary policy setup.
The assessment of the economic and financial conditions showed that the current monetary setup is appropriate and decided to preserve the current monetary setup and to offer CB bills at the auction at the level of due amount (Denar 25,500 million), at unchanged interest of 3.25%.
The economy continues to recover soundly, partially supported by the lending activity of the domestic banks. The economic recovery is being conducted in the absence of price pressures. Such developments indicate suitable environment for sustainable recovery of the private sector, and the Committee once again estimated that the support to the domestic economy 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 data on the economic activity for the second quarter justified the expectations for solid recovery of the domestic economy, with a real GDP growth of 4.3%. The latest high frequency indicators for the third quarter of 2014 indicate further favorable trends, but slightly more moderate. The slower growth in industry and trade and the lower value of completed construction works are sectors that are expected to contribute towards growth deceleration. The estimations further indicate that the economic growth will not cause major imbalance in the economy.
The latest inflation data in September 2014 show monthly stagnation of the general price level. On annual and cumulative basis, the inflation registers negative rate of 0.7% and 0.2%, respectively, mainly due to lower prices of the food component. Also, for the first time in a longer period, the core inflation entered the zone of negative annual changes. This performance indicated lower inflation rate than expected in the April projection. The latest expectations for import prices also indicate a lower inflationary pressure than expected. The lower initial conditions and revisions of the external input assumptions point to downward risks to the inflation projection for 2014. On the other hand, the energy and food prices are still associated with upward risks (related to geopolitical tensions in Iraq, the Russian-Ukrainian conflict, and possible effects of flooding in the region). However, it is estimated that in the balance of risks, in terms of the projected price movements, the downward risks still dominate.
In September, the foreign reserves increased compared to the end of the second quarter, mainly as a result of the external borrowing of the Government on the international capital market, and the amounts withdrawn from the World Bank's Development Competitiveness Policy Loan. The foreign reserves register moderate increase even if excluding the effect of Government's indebtedness, which is due to the favorable developments on the foreign exchange market and the NBRM interventions of purchasing foreign currency. Thus, the variation in the foreign reserves is within the projections, while the foreign reserves adequacy indicators further indicate a sufficient level of foreign reserves to cope with possible unpredictable shocks.
The preliminary data for September show accelerated annual growth of total loans, with the lending dynamics exceeding the projected level for the third quarter. After the high rise in August, the preliminary data as of September indicate again solid deposit growth, with the total monetary growth being in line with the projections. The movements on the credit market emit signals for more stable expectations and second-round effects of the past monetary relaxation on the lending activity. However, in conditions of uncertain economic environment, there are still downward risks associated with lending to the private sector in the next period, although less pronounced.
The banks' liquidity increased under the influence of autonomous factors, and the banks placed the excess liquidity in short-term deposits with the National Bank, registering also more moderate activity on both the unsecured deposit market and the secondary securities market. Having in mind the high level of liquidity and the primary purpose of the deposit facility with the National Bank, for balancing the banks' short-term surplus of liquid assets, the Committee decided to reduce the interest rate on both instruments. Thus, the interest rate on overnight deposit facility decreased from 0.75% to 0.50% and from 1.25% to 1% on the seven-day deposits. On the foreign exchange market, the movements were stable and the National Bank intervened by purchasing foreign currency from the market makers.
In the euro area, the September data pointed to enhanced risks for further downward inflation. In such circumstances, and given the weak economic indicators, the ECB continued to take measures toward further loosening of the monetary conditions. Thus, after the reduction of the interest rates in September, in October the ECB announced more detailed information about programs for outright purchase of securities, which it intends to implement in the following two years. Through these programs, the central bank takes more active role in increasing the money supply and expects effects through the portfolio balance, as a monetary transmission channel, having in mind that the increase in liquidity could have second-round effects on the prices of many of the financial instruments in the euro area.
The recent estimations of the NBRM do not point to major changes in the environment for conducting monetary policy. It is expected that the foreign reserves adequacy indicators will remain in the safe zone. Also, given the borrowing of the Government on the international capital market, which was not included in the last projections, the adequacy indicators for 2014 will be even better than expected. There are no price pressures, the economic growth is solid, while the credit market movements indicate positive developments on the credit market.
Under such favorable economic conditions, in the following period, the NBRM will mainly be focused on both monitoring the attainment of the projected path of the foreign reserves and developments on the foreign exchange market and it will adjust the monetary policy accordingly. As before, the risks to the primary macroeconomic scenario are mainly of external nature and associated with possible changes in the recovery dynamics of the global economic growth and the rise in world prices of food and energy. Weaker performance in the euro area than expected, highlights the risks related to global recovery pace. The effects of the developments related to the conflict in Ukraine, the floods in the region, as well as the geopolitical tensions in Iraq remain risk factors. The risks arising from these developments can materialize through instability and hardly predictable energy prices and prices of cereal products, and it could also affects the expected economic recovery.
The NBRM will continue to monitor closely the future macroeconomic developments and the possible materialization of the risks and it will adjust the monetary policy accordingly.