Regular meeting of the Operational Monetary Policy Committee of the National Bank

On 9 February 2021, the National Bank Operational Monetary Policy Committee held its regular meeting and discussed the developments on the international and domestic financial markets and the indicators of the domestic economy in the context of the monetary policy setup.

At its meeting, the Committee decided to keep the interest rate at the level of 1.5%, whereby the monetary policy retained its relaxed character. The decline in the key interest rate, as well as the more significant reduction of the offered amount of CB bills in the last year contributed to increasing liquidity of the banking system and supporting credit flows in the economy. Given the already performed relaxation, and amid still present risks and uncertainty, at its meeting, the Committee decided to keep the interest rate on CB bills at the current level, as appropriate to the current economic and financial conditions. At the same time, the Committee assessed that the liquidity released through the main National Bank instrument of Denar 15 billion last year is appropriate, and decided at today’s auction to offer the same amount of CB bills of Denar 10 billion.

The latest available macroeconomic indicators for the gross domestic product suggest an annual decline in the economy in the first three quarters of the year of 5.9%, which is in line with the expectations of the latest forecasts of the National Bank for a fall of around 6%. The latest available data on the economic activity for the fourth quarter indicate more favorable movements in the domestic economy and more moderate negative effects of the health crisis compared to the previous quarter, in conditions of target and less restrictive measures for dealing with the second wave of COVID-19, as well as a gradual adjustment of the behavior and habits of entities to the new situation and a recovery of the production and exports included in the global value chains. Namely, in circumstances of growth in the exports in the last quarter of 5.1%, the industry registered a further deceleration in the annual fall, whereby December also registered an annual growth, for the first time from the occurrence of the pandemic. The fall in total trade turnover also slows down, while construction registers a growth acceleration.

The average annual inflation rate for the entire 2020 equals 1.2%, which is in line with the forecasted rate according to the latest forecast of the National Bank. In conditions of revisions in the external input assumptions in different directions, there is still highlighted uncertainty arising from the movement in the world prices of primary products in the next period and their impact on domestic prices, according to the uncertain economic effects of the second wave of the COVID-19 pandemic and its duration, as well as the occurrence of a mutation of the coronavirus and the problems with the distribution of the vaccine.

Foreign reserves are still at an appropriate level and are maintained in the safe zone, at a growth pace in 2020 that is better than expected according to the latest forecasts. Namely, instead of a fall, foreign reserves registered a growth. Foreign trade data for the entire 2020 suggest a narrowing of the trade deficit and are in line with the latest forecasts. The external sector data for the first quarter of 2021 are currently available for a very short time period, which is not sufficient to draw more precise conclusions.

Analyzing total deposits and total loans, the initial data as of January 2021 show their further annual growth, within the expectations according to the forecast.

In the period between the two monthly meetings of the Committee, the liquidity of the banking system in denars remained at a relatively solid level, confirmed by the absence of the need for banks’ trading on money markets. The movements on the domestic financial markets also suggest a seasonal decrease in the net supply of foreign currency by natural persons on the currency and the foreign exchange markets, common for the period after the New Year and Christmas holidays and a simultaneous intensification of the net need for foreign currency by the corporate sector. The foreign currency liquidity of the banks remained at a solid level, and the National Bank participated with occasional interventions for selling foreign currency.

Investors’ expectations for a faster global economic recovery that were present at the beginning of January, partially weakened by the end of the month due to the temporarily reduced optimism for the fast implementation of the new fiscal package of measures in the USA, the deteriorating perceptions for the economic recovery of the euro area and the slow process of vaccination worldwide. Such perceptions on the international financial markets contributed to a moderate growth of the value of the US dollar against the euro, but also to maintaining the prices of government bonds in the euro area and the United States at relatively high levels.

Overall, at the meeting of the Committee it was concluded that the flows have thus far been stable and the latest macroeconomic indicators are generally in line with the expectations, with unchanged perceptions for monetary environment compared to the previous assessment. However, the uncertainty and risks from the pandemic caused by COVID-19 persist, both globally and within the domestic economy. In the period ahead, the National Bank will carefully monitor the trends and potential risks, in order to adequately adjust the monetary setup, if necessary.