NBRM's Operational Monetary Policy Committee held its regular meeting

On 11 April 2017, 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.

At the Committee's meeting it was decided to maintain the interest rate on the CB bills at 3.25%, in conditions of enduring risks arising from the domestic political developments. Having in mind that the banks' potential liquidity has stabilized, it was decided that at the auction to be held on April 12, the supply of CB bills to be kept at the level of the due amount and to amount Denar 30,000 million. 

In relation to the economic activity, the released data on the GDP growth for 2016 of 2.4% were in line with the NBRM projection of 2.3%. For the first quarter of the year, it is expected to maintain the positive GDP growth dynamics, but the number of the high frequency indicators is limited (part of the key indicators are available only for January). In addition, some of them register movements in different directions, thus increasing the uncertainty about the assessment of the situation in the economy in the first quarter of the year. 

March data on the movement of prices in the domestic economy show annual inflation growth of 0.6%, which is slightly lower than expected. On the other hand, the upward corrections of the expected movement for 2017 in the input assumptions on import prices mean upward risk to the inflation forecast in 2017, due to factors on the supply side. 

The expectations of the economic agents remain relatively stable, while the assessments on the soundness of the economic fundamentals are still positive. Despite the decrease in the foreign reserves in the first quarter, the favorable developments were maintained on the foreign exchange market, whereby in the first three months of the year, cumulatively, the NBRM intervened through small net purchase of foreign currency. Foreign reserves remain at an adequate level.

In March, the liquidity of banks continued to increase, at more moderate pace and mainly influenced by seasonally lower demand for cash in the economy. 

Given the continued growth of liquid assets in the past six-month period, in March the National Bank withdrew a significant portion of the excess liquidity through the primary instrument - CB bills. The sterilization of the structural surplus of funds through CB bills resulted in reduced bank placements in deposit facility with the National Bank, bringing their share relative to the primary instrument around the historical average of 25%. In order to compensate short-term liquidity needs, the banks in March intensified their activity on the money markets, where along with uncollatralized deposits, they traded on the secondary market as well, by concluding outright and repo transactions.  From the aspect of the banking system, the preliminary data on March 2017 show almost unchanged household saving in the first quarter relative to the end of 2016. Given moderate monthly increase in January and February, such performance reflect the fall in household deposits in March. On the other hand, the corporate deposits in March registered monthly rise, but insufficient to compensate the decrease in household deposits. Such performance resulted in decelerated deposit growth, but their level is higher than expected for the end of the first quarter as a result of the good performance at the end of 2016. In terms of lending activity, preliminary data as of March show growth of loans on monthly and annual basis and maintenance of the trend of more pronounced lending to the household sector. However, the recent data on lending activity point to weaker performance than forecasted for the first quarter of 2017, according to the October forecast. 

Data on foreign reserves in March show a decline compared to the end of 2016, in one part due to temporary factors. According to all foreign reserves adequacy indicators, they remain in a safe zone. Analyzing external sector indicators, for the beginning of the year, there are available data on the currency exchange market for the first quarter, which indicate slightly lower net inflows of private transfers in terms of expectations. Also the last available data on the external trade for the first two months of 2017, indicate deviation, i.e. slightly higher trade deficit than expected. However, the short period and the volatile seasonal dynamics are limiting factor for making more reliable conclusions than expected for the entire quarter.

At the meeting it was concluded that in March the banks registered net sale of foreign exchange in the bank-customer transactions on the foreign exchange market, which is reflection of the companies’ seasonal higher demand for foreign exchange.  The banks compensated the demand for foreign currency from own sources, which in conditioned the neutral position of the National Bank in the interventions on the foreign exchange market. The the March performance, the National Bank's interventions on the foreign exchange market in the first quarter of the year refer to moderate net purchase of foreign currency from market makers in the amount of Euro 2.8 million, versus net sales of Euro 17.2 million in the same period in 2016. This improvement in the performance has been registered despite higher net sale of foreign currency for customer needs, mainly companies and non-residents, which was fully neutralized due to improved foreign currency liquidity of the banks.

On international financial markets, expectations for a faster exit from the expansionary policy of the ECB prevailed in March, which was followed by a rise in yields on government bonds in the euro area. After the parliamentary elections held in the Netherlands, perceptions of political risk in Europe were less pronounced and the attention of market participants has focused on the upcoming presidential elections in France. In the United States, the expected decision on increasing the interest rates by FED was adopted, intensifying also the discussions for a gradual reduction of liquidity support through quantitative easing programs, having in mind the favorable economic perspectives for the next period.

The Committee concluded that the assessments for stable economic fundamentals remain positive. Risks arising from the domestic political developments remain pronounced. At the same time, the risks arising from the global environment are still in the focus. 

The NBRM will closely monitor the developments in the coming period, while the future changes to the monetary policy will largely depend on the further stabilization of the domestic political environment.

Governor’s Office