OREANDA-NEWS. On 9 December 2014, the NBRM Operational Monetary Policy Committee held a regular meeting and discussed the situation in the domestic economy and the countries in the region, the developments in the international and domestic financial markets and the latest macroeconomic indicators in the light of the monetary policy setup.

The assessment of the economic and financial conditions showed that the existing monetary policy setup is adequate and the Committee decided, at the auction, to offer CB bills in the amount that falls due (Denar 25,500 million), at an unchanged interest rate of 3.25%.

The economy has been recovering at a solid pace, in part supported by the credit activity of domestic banks. Economic recovery takes place in the absence of price pressures. These developments point to the existence of a suitable environment for a sustained recovery of the private sector, and it was stated that the support of the domestic economy through the monetary policy measures is sufficient. The exit from the zone of accommodative monetary policy in the coming period will depend on the changes in the external position of the economy and the effects on the foreign reserves.

Recent macroeconomic indicators do not suggest major changes in the environment for conducting monetary policy. Concerning economic activity, high-frequency indicators for the third quarter of 2014 point to maintenance of positive rates of economic growth, although probably at a slower pace compared to the growth of the first half of the year. Shifts in the key sectors are divergent. Namely, the industry and trade data for the third quarter indicate retention of solid growth rates, despite the value of completed construction works whose decline has deepened. Taking into account the expectations for more intensive infrastructure construction works, for now, such shifts in construction appear to be temporary. 

In November 2014, the latest inflation data show the same level of prices compared to the previous month. On an annual and cumulative basis, inflation registers identical negative rate of 0.3%, respectively, mainly due to lower prices in the food component and energy prices. Core inflation has been in the zone of negative annual changes for the third month in a row. These performances pointed to an inflation rate that is in line with the October projections, i.e. that the annual inflation in 2014 will remain unchanged. The latest expectations for import prices for the next year have changed in a very short period of time, acknowledging the uncertainty about their trajectory. The changes in oil prices are again downward, while some of the global food prices have been revised upward after a long period of time. Similar initial conditions and revisions of exogenous assumptions point to balanced risks around the inflation projection for the period ahead. The sources of risks to the inflation for the next period are still mainly associated with the global growth and the dynamics of prices of primary products in the world market. 

After the high accumulation of foreign reserves in the third quarter, mainly due to the external government borrowing since the beginning of October, the foreign reserves dropped. The foreign exchange market interventions and government transactions are the main factors of such changes. The reduction in foreign reserves in the last quarter is as expected, with the indicators of foreign reserves adequacy still suggesting a level of foreign reserves sufficient to deal with any unforeseen shocks.

Final data for October confirmed the findings obtained from the preliminary data on loans and deposits. They indicate a continuation of the favorable trends in credit activity, whose annual growth accelerated and reached 9.7%. In October, deposits increased at a moderate pace and went up by 8.5% annually. The developments in credit aggregates are as projected, while the growth of deposits is slightly slower than expected. However, data are available for only one month of the quarter, and considering the variability of the deposit flows, there could be changes in such deviations by the end of the year. Credit market developments signal stable expectations and knock-on effects of the monetary easing on lending activity. Yet, given the uncertain economic environment, the downward risks surrounding the lending to the private sector in the period ahead still persist.

The banks' liquidity increased under the influence of autonomous factors, and led to placing excess liquidity in short-term deposits with the National Bank. In money markets, market participants traded in unsecured deposits, while the secondary securities market (so-called OTC market) registered an increased activity with outright and repo transactions. The foreign exchange market developments were under the influence of usual seasonal factors.

The latest macroeconomic indicators suggest further divergence of economies of the euro area and the United States. In the United States, the economic developments are generally favorable and do not compromise the further normalization of monetary policy. On the other hand, in the euro area, the European Investment Plan of Euro 315 billion was presented to encourage private sector investments.

The latest NBRM estimates do not indicate major changes in the environment for conducting monetary policy. The foreign reserves adequacy indicators remain in the safe zone. There are no price pressures, the economic growth is solid, and the credit market developments suggest favorable shifts in the credit market. 

In such favorable economic conditions, in the period ahead, the NBRM will mainly focus on monitoring the realization of the projected path of the foreign reserves and the foreign exchange market developments and will adjust monetary policy accordingly. As before, the risks to the baseline macroeconomic scenario are mainly exogenous and are associated with the possible changes in the pace of recovery of the global economic growth and the growth of world prices of energy and food. The weaker performance in the euro area than expected and the downward correction of estimations for its future economic performance further highlight the risks about the dynamics of the global recovery. The effects of geopolitical turmoil remain risk factors. The risks arising from these developments could materialize through volatility and low predictability of energy and cereal product prices, and could affect the expected economic recovery.

The NBRM will continue to monitor closely the future macroeconomic developments and the possible materialization of risks and will adjust monetary policy accordingly.