The NBRM's Operational Monetary Policy Committee held its regular meeting.

On 12 June 2018, 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 light of the monetary policy setup.

Following the interest rate reduction in March 2018 reflecting the sound economic fundamentals, and while further stabilizing the economic agents’ confidence, at this meeting of the Committee it was concluded that the monetary setup was appropriate, therefore maintaining the CB bills interest rate at the level of 3.00%. At the meeting, it was also decided to keep the CB bills offer unchanged at the level of Denar 25,000 million.

At the meeting, it was concluded that the comparison of the latest macroeconomic indicators with their forecasted dynamics points to certain deviations. This particularly applies to the economic activity. Namely, according to the estimated GDP data for the first quarter, the economy registers a slight increase of 0.1% which is below the estimations embedded in the April forecasts. In the first quarter, the continuity of solid growth of the export activity was maintained, as well as the moderate growth pace of household consumption. However, amid temporary interruption and prolongation of some of more significant infrastructure projects, total investments declined, almost neutralizing the positive performances in other GDP components.

Regarding the changes in consumer prices, available data for May 2018 show an average annual increase in the price level of 1.5% given the growth of all components, with the largest contribution of the core inflation and food prices. Previous inflation performances are lower compared to the April forecast, but at the same time there have been upward corrections in world oil prices and cereals for 2018. In such circumstances, risks regarding the forecast of 2% for 2018 have been assessed as balanced.

In the period April-May, shifts in foreign reserves are in the direction of their increase, given the favorable developments in the foreign exchange market and net purchase of foreign currency by the NBRM. Indicators for their adequacy show that they continue to remain in a safe zone. Regarding the external sector available data, their number is not sufficient for now to draw reliable conclusions in this domain. Performances in the foreign trade for April point to the possibility of a lower than expected trade deficit for the second quarter of 2018. Foreign exchange market data, as of the first decade of May, point to higher than expected net inflows from private transfers for the second quarter.

Regarding monetary developments, initial monetary data for May show significant acceleration of the monthly growth, deposits and lending activity. The growth of the deposit base this month is largely due to the higher corporate deposits, and positive but more moderate contribution of household savings. In May, there was an acceleration of the lending activity in the credit market, registering an increase of both household and corporate loans. Deposit and credit flows during the period April-May are higher than forecasted for the second quarter indicating exceeding the forecast for this period.

In the period between the two monthly meetings of the Committee, government’s transactions enabled the increase of bank’s liquid assets, which was partially reduced by the increased demand of Denar cash from households. On the foreign exchange market, despite the seasonal increase of the demand for foreign currency by companies in relation to their regular operation, on an annual basis, banks registered a lower net sale of foreign currency which was mainly due to the better performances with almost all client groups.

Such developments on the foreign exchange market, combined with the solid foreign currency liquidity of the banks, enabled further high supply of foreign currency on the interbank market and purchase of markets’ excess foreign currency by the NBRM in the amount of Euro 8.5 million. Thus, in the first five months of the year, NBRM purchased a total of Euro 56.5 million.

In the analyzed period, the increase of bank’s liquidity influenced the reduced demand on the money markets, where the market interest rates remained at a relatively stable level. Also, after satisfying the market demand, banks continue to place the excess cash assets in overnight deposits with the National Bank.

In May, international financial markets were characterized by their pronounced volatility amid the uncertainty in Italy on forming the government and increased global trade tensions with the introduction of import duties by USA. Investors were focused on investing in safe instruments, therefore yields of government bonds in USA and the euro area decreased, and the euro depreciated.  These developments to some extent stabilized in early June, as a result to the efforts of the new government in Italy to reduce the budget deficit and remain in the euro area, as well as the restrictive views of the ECB officials and the improvement of the relations between USA and North Korea.

In summary, at the meeting was concluded that the latest macroeconomic indicators and assessments, although suggesting certain deviations in relation to the forecasted dynamics, do not, however, cause major changes in the perceptions for the conditions in which the monetary policy is conducted.

In the next period, NBRM will carefully monitor all economic indicators and developments in the domestic economy and, if necessary, take appropriate measures.