On 12 September 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

On 12 September 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.

 Having in mind the stabilization of the banks' liquidity potential, the Committee decided to keep the amount of CB bills at an unchanged level. In this light, the Committee decided CB bills in the amount of Denar 25.000 million at an unchanged interest rate of 3.25% to be offered at the CB bill auction, which will be held on 13 September. 

 Analyzing specific economic indicators, despite the signals from the high frequency indicators for moderate improvement of the situation of the economy, the estimated GDP data for the second quarter show a decline in the economic activity of 1.8%.

The decrease in the activity is due to the fall in the investment activity, while all other demand components have positive performances. Thus, the growth of private consumption accelerated, supported by the favorable labor market developments and the credit support to households. At the same time, in the second quarter, the contribution of the net export is positive, in conditions of favorable performances of the new export facilities, but also recovery of part to the traditional segment. The available high frequency data for the third quarter are limited, which hinders the precise assessment regarding the pace of activity in this quarter. The realized negative growth rate in the first half of the year indicates a lower growth than forecasted for the entire 2017.

August inflation data suggest certain acceleration in the annual inflation rate to 1.9%, with average annual price growth in the first eight months of 1%. The average price growth in this period reflects primarily core inflation, and less energy prices. Food prices continue to make negative contribution to the average price change, which is gradually declining. Performances in inflation mainly correspond with the forecast, and the input assumptions expectations for the import prices of primary commodities are mainly downward, yet extremely volatile. In such conditions, risks surrounding the average inflation forecast for 2017 (1.3%) are assessed as balanced.

Analyzing the external sector, foreign reserves data for August show a decrease compared to the end of June, which is mainly due to the regular settlement of government liabilities on external debt. The NBRM interventions on the foreign exchange market were aimed at purchasing foreign currency and acted towards growth of foreign reserves. Thus, all foreign reserves adequacy indicators show that they constantly hover in a safe zone. The number of available external sector data for the third quarter is small and so far show developments in accordance with the expectations, and this mainly refers to trade deficit data in July and the latest available currency exchange market data. However, the restricted number of data and the volatile seasonal dynamics are a limiting factor for making more reliable conclusions about the expectations for the external sector indicators for the entire quarter. Regarding the balance of payments, the data for the second quarter suggest improved performances in the current and the financial transactions compared to the April forecast.

The foreign exchange market developments in August were due to the seasonal factors of increased supply of foreign currency by exchange offices, which enabled improvement of banks' foreign assets and National Bank interventions to purchase Euro 20 million. These favorable developments, which were characteristic of the first half of the month, enabled banks to fully compensate the increased demand for foreign currency by clients by the end of August, which, apart from their regular operations, was related to the capital flows and private sector deleveraging abroad.

Initial monetary data for August 2017 show increased total deposits on a monthly basis, despite the fall registered in the previous month. The increase in the deposit base in August was also due to the growth of corporate deposits, but also to the increase in household savings.   The deposit base for the time being is lower than the April forecasts for the third quarter, however there is a gradual reduction in the unfavorable deviation. In August, banks continued to provide credit support to the economy, still mainly aimed at households, whereby the level of total loans at the end of August is within the expectations of the April forecast.

In the period between the two last monthly sessions of the Operational Monetary Policy Committee, the banks' liquidity potential minimally increased. The change in banks' liquidity in this period was influenced by the lower demand for denar cash, which is usual for the period following the season of summer vacations. Also, liquidity increased due to the National Bank interventions to purchase foreign currency from the foreign exchange market. Banks targeted part of the excess funds on short-term monetary instruments, mainly 7-day deposit facility with the National Bank, the situation of which in the last few months was maintained around Denar 7.5 billion. At the same time, banks overcame short-term liquidity changes by trading on the market of interbank deposits, where demand for deposits with maturity up to one week dominated, and the purchase and sale of short-term securities on the secondary market was also significant.

In August, amid perceptions of geopolitical risks, investors were aimed at secure instruments. Consequently, there was a decrease in the government securities yields in the euro area and the United States, followed by depreciation of the US dollar. Analyzing the macroeconomic situation in the euro area, at the last meeting of the ECB, it was concluded that economic growth is sustainable and solid in most of the monetary union members. The growth rate in the first half of the year exceeded the expectations, but still does not contribute to more significant price pressures. In such circumstances, the ECB decided to keep the current monetary policy setup and no announcement was made of possible changes to the quantitative easing program.

At the meeting, the Committee assessed the existing monetary setup as appropriate to the current economic conditions. The Committee concluded that most indicators important for the monetary policy do not deviate significantly from the expectations, yet there are points where certain vigilance is required. Foreign reserves generally move along the expected path, whereby particularly important are the foreign exchange market developments that are stable, seasonal and without pressures. At the same time, the foreign reserves indicators remain at an adequate level.

The external position, viewed through the foreign reserves performance, is generally within the expectations and shows retention of sound economic fundamentals. This is also indicated by credit flow data.

In the period ahead, the National Bank will closely monitor all economic indicators and developments in the domestic economy, while the future changes in the monetary policy will greatly be conditioned by the developments in the domestic economy and the external sector.