On 8 October 2019, the National Bank’s Operational Monetary Policy Committee discussed the key domestic economy indicators and the developments on both, international and domestic financial markets, in the context of the monetary policy setup.

The Committee found that the monetary setup was appropriate to the current economic and financial conditions and that the economic fundamentals remained sound, with no imbalances in the economy. The low and stable inflation and favorable position of the balance of payments, since the beginning of the year, continuously contribute to interventions for purchasing foreign currency by the National Bank on the foreign exchange market. The dynamics and currency structure of household savings show stable expectations. In such circumstances, at its meeting the Committee decided to keep the CB bills’ interest rate at 2.25% and at the CB bills auction on 9 October 2019, to offer CB bills in the amount of Denar 25,000 million, the same amount as the one that falls due.

Regarding the latest macroeconomic indicators for the domestic economy, GDP growth in the first half of the year, according to the published estimated data, amounted to 3.6%. For the third quarter of the year, the volume of available data is limited. The currently available high-frequency indicators for the period July-August, generally point to continued growth in economic activity, amid currently more favorable developments in industry, trade and construction, compared to the previous quarter.

The average annual inflation rate for the first nine months of the year amounted to 1.0%, with the price growth being lower than expected. At the same time, expectations for the foreign prices fluctuation, which affect the domestic prices, are mainly revised downwards. As a result, the risks to the inflation forecast for 2019 of 1.5%, for now, have been assessed as primarily downward.

As for the external sector indicators, the available data on the balance of payments for the first half of the year show improved performance in both the current and the financial transactions, compared to the April forecast.  In terms of the data for the third quarter, the performances on the currency exchange market as of the second 10-day period of September point to the possibility for slightly higher net inflows of private transfers relative to the forecasts for the third quarter. Data on foreign trade as of July and August point to a possibly larger trade deficit than expected for the third quarter, according to the April forecast. At the end of September, the foreign reserves were higher compared to the end of 2018, with all adequacy ratios being in the safe zone.

In terms of movements in total deposits and total loans, preliminary data for September show their further annual growth, according to the expected path within the April forecasts.

During the period between the two sessions of the Committee, banks' liquidity increased, mainly as a result of the interventions for purchasing foreign currency by the National Bank on the foreign exchange market. Namely, in September, the National Bank purchased Euro 124.7 million, when the banks registered net purchase of foreign currency in the transactions with their clients for the third consecutive month. The high monthly amount based on interventions was partly realized in conditions of increased net supply of foreign currency by non-residents. In addition to these developments, the active approach for managing foreign currency liquidity by the banks contributed to the high monthly amount of National Bank interventions, given the negative returns on the international financial markets. The purchase on the foreign exchange market continued at the beginning of October, whereby cumulatively from the beginning of the year as of 7 October, the National Bank has purchased Euro 366.45 million.

In conditions of high denar liquidity in the banking system, the banks had moderate need to borrow on the interbank deposit market. Consequently, they continued to direct the excess free denar funds to deposit facilities with the National Bank, which provide high flexibility and access to funds for smooth domestic lending.

In September, the international financial markets registered a moderately higher propensity to take risk by investors, mainly due to the increased optimism for resolving the trade dispute between the United States and China after the mutual temporary relaxation of tariff barriers. The largest central banks took measures for relaxation of monetary policies, which was perceived by market participants as less expansive than expected, which, together with the increased interest in higher risk securities, resulted in higher yields on government bonds on both sides of the Atlantic. ECB announced a package of expansive measures aimed at supporting the economy of the euro area, including the reduction of the deposit interest rate of 10 basis points at a level of -0.5%, as well as the launch of the securities purchase program on 1 November, in the amount of Euro 20 billion monthly. At the same time, it was stated that interest rates would remain at current or lower level, until a strong convergence of the inflation rate to a level close to, but below 2% is observed. At the Fed's meeting, as expected, the target level of movements of the policy rate was reduced by 25 -basis points, from 1.75% to 2%.  Moreover, it was announced that this reduction was considered sufficient for the further maintenance of the economic expansion.

Overall, at its meeting the Committee concluded that the latest macroeconomic indicators and assessments indicate certain deviations from the forecasted dynamics, but the perceptions about the environment for monetary policy conduct remained mainly unchanged compared to the previous forecast. The Committee again pointed to the adverse risks from the external environment, which are more pronounced in comparison with the period of preparation of the April forecasts. In the period head, the National Bank will carefully monitor the trends and potential risks in the context of the monetary policy setup.