Key Policy Rate Kept on Hold
At today’s meeting, the NBS Executive Board voted to keep the key policy rate on hold, at 3.0%.
In making such a decision, the Executive Board was primarily guided by the expected movement in inflation and its underlying factors going forward, and the effects of past monetary policy easing. After touching this year’s low of 1.1 % y-o-y in April, inflation is expected to gradually move towards the target, while staying closer to its lower bound by end-2018. Its approach to target midpoint of 3% is anticipated in the second half of 2019, primarily on account of an expected rise in demand. One-year ahead inflation expectations of both financial and corporate sectors are below the target midpoint (2.5% and 2.7%, respectively). Two-year ahead inflation expectations of the financial sector and the NBS are at the target midpoint of 3.0%, while corporates put inflation close to this point (2.8%).
The NBS Executive Board recognised that 2018 has seen acceleration in lending and economic growth. It was assessed that growth has been driven mainly by investment, which will continue to support diversified growth of export-oriented sectors of the economy going forward.
In view of the uncertainties in the international commodity market, primarily the movement of oil prices which posted a significant increase since mid-last year, the Board mandated further caution in the conduct of monetary policy. However, according to futures and assessments of relevant international institutions, global oil prices are not likely to rise further, but will instead stabilise by the end of the year and decline in the course of 2019. Uncertainties also concern the volatile movement in global prices of agricultural commodities and the impact of weather on domestic production and fruit and vegetable prices. In addition, inflation in the euro area, our most important trade partner, increased to 1.9% in May. However, the rise in euro area inflation is assessed to be temporary, reflecting higher energy prices. Its more durable return to the target is expected in the years to come. Caution is still needed because of the diverging policies of the Federal Reserve System and the European Central Bank, and uncertainty in terms of the pace of their normalisation going forward. Uncertainties in international markets are also fuelled by geopolitical tensions. Nevertheless, the Executive Board points out that the resilience of our economy to potential negative effects from the international environment has increased, owing to improved macroeconomic trends and a more favourable outlook for the period ahead.
The next rate-setting meeting will be held on 12 July 2018.