Operational Monetary Policy Committee held its regular meeting

On 14 February 2017, the NBRM’s Operational Monetary Policy Committee held its regular meeting and discussed the situations in the domestic economy, the developments in international and domestic financial markets and the indicators of the domestic economy in the light of monetary policy setup. 

After the cuts by 0.25 percentage points in December 2016 and January 2017, at this session was decided to reduce the CB bills interest rate for additional 0.25 percentage points and amount to 3.25, and the supply of CB bills remain unchanged to Denar 25,000 million. Such reactions represent normalization of the monetary policy and is a reflection of the continuous stabilization of the expectations and confidence of the economic agents and thereby continuous exhaustion of the political crisis effects on the economy.  

Stabilizing signs continue to be evident in both points mostly affected by the political crisis – household savings and the propensity for holding foreign currencies. The preliminary January data points to further growth of household savings in the banking system, which is an increase for eight consecutive months. At the foreign exchange market, after the high purchase amount in the last six months, in January, the NBRM’s position was neutral. Foreign reserves remain at an adequate level. Favorable developments are in conditions when the assessments of the stability of the economic foundations remain positive. 

In terms of the economic activity, the number of currently available indicators for the fourth quarter of the year is limited and their movement gives different signals. However, viewed as a whole, the economic situation in the last quarter of the year is assessed as somewhat less favorable compared to the third quarter. Past performances and high-frequency available indicators point to economic growth during the whole 2016, which shouldn’t deviate much in terms of the projection. 

January data on domestic consumer prices developments indicate an annual inflation growth of 0.6%, which is in line with the expectations. However, the upward corrections of the expected development for 2017 in the input assumptions for import prices point to potential upward risks in terms of the projected inflation in 2017, as a result of factors on the supply side. 

Further stabilization of the economic agents’ expectations is evident through changes in household deposits in the banking system. The preliminary data for 2017 shows further growth of household savings for the eighth consecutive month. The total deposit base registered a monthly decline in January, which is not unusual for this period. On the other hand, the solid increase pace of deposits on an annual base also continued in January. In terms of credit activity, preliminary data as of January show a slight decline on a monthly basis, following the significant increase in the previous month. Decrease in total loans, similar to the first month in the previous two years is entirely due to the lower level of loans to corporations, amid moderate increase of household loans. Annually, according to preliminary data, the credit activity in January grows at a solid pace, which is close to the projected growth for the first quarter of 2017, according to the October projection.  

During January, the liquidity of banks continued its upward trend, which during this month was due to the seasonal factors, mainly regarding the lower demand of cash in the economy after New Year’s and Christmas. In such conditions, part of excess liquid assets in denars at the beginning of the year was withdrawn through the basic instrument – CB bills.  Short-term changes in the liquidity of banks were harmonized through placing assets in deposits with the National Bank, which was maintained at a relatively high level. 

In the foreign exchange market, at the first month of the year, developments were usual and in accordance with the National Bank expectations. At this session was concluded that the banks in the transactions with their consumers registered a net sale of foreign currencies, which was mainly reflected to the higher seasonal demand of foreign currencies by the companies. On the other hand, in January, natural persons had a moderately higher supply of foreign currencies on an annual basis, which suggests to further continuation of the favorable trends in this market segment. Banks fully refunded the net demand of currencies from clients in January from their own funds, which lead to balancing of the interbank foreign exchange market and the neutral position of the National Bank on the interventions in the foreign exchange market. 

Foreign reserves data show a decrease in January, mostly due to temporary factors. All adequacy indicators of foreign reserves show that they continuously hover in the safe zone. In terms of external sector indicators, for the beginning of the year, only data for the exchange markets as of the second decade of January are available, which point to somewhat lower net-inflows of private transfers compared to the projected. However, the period is very short to give more reliable conclusions. On the other hand, latest available data on balance of payments point to the possibility of current account deficit, close to the projected and higher than expected net inflows in the financial account.  

International financial markets were mainly influenced from the expectations of the market participants for more details regarding the economic and trade policy of USA which will be conducted by the new president’s Cabinet in the following period.  Thus, the value of the US dollar moderately declined, and the gold price registered an upward trend. In conditions of still unclear effects of the new fiscal policy, at the session in January, the Federal reserves maintained the cautious attitude relating the future steps in order to normalize the monetary conditions in the American economy.  On the other hand, according to the ECB policy makers, despite the upward developments of inflation, support from monetary policy is still needed in order to conclude that inflation’s approach to the target is sustainable. In such conditions, a relatively higher spread between yields of government bonds in USA and euro area was maintained. 

At this session, it was assessed that the latest data show further stabilization of the expectations of the economic agents, which contributes to the growth of household savings and stable developments in the foreign exchange market. Such favorable shifts point to present conditions for adjusting the key interest rate on the level prior May 2016. 

The assessments for the stability of the economic foundations are positive. The risks from the domestic political events were mitigated, but however they continue to be present and pronounced.  Also the risks from the global environment remain current. 

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