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08.08.2019.

Key Policy Rate Trimmed to 2.5%

At its meeting today, the NBS Executive Board voted to trim the key policy rate to 2.5%. By cutting the rate to a new lowest level in the inflation targeting regime, the NBS provides additional support to credit and economic growth.

In making the decision, the Executive Board was mainly aware of the new, August medium-term inflation projection and the expected movements of other macroeconomic indicators at home and abroad in the period ahead. According to the August projection as well, inflation will be firmly under control as in previous years, and will continue to trend within the bounds of the target tolerance band (3.0±1.5%) until the end of the projection horizon i.e. over the next two years – most probably in its lower part of the target band. Y-o-y inflation in June decreased to 1.5%, confirming the announcements by the Executive Board that it would slow down as of May. Subdued inflationary pressures are also confirmed by still low and stable core inflation, as well as financial and corporate sector inflation expectations which undershot the 3.0% target for both one and two years ahead.

In addition to domestic macroeconomic conditions conducive to monetary policy pursuit, the Executive Board’s decision on the rate cut was also made in light of international developments, notably the slowdown in global trade and growth and the increasingly clear signals hinting at monetary policy accommodation, followed by actual measures by leading central banks. As had been expected, the Fed lowered the key rate at end-July, while the ECB announced an unchanged or lower level of its key interest rates at least through mid-2020, with a new programme of longer-term refinancing operations as of September. This will help maintain favourable global financial conditions longer than initially expected, which should have a positive impact on capital flows toward emerging economies. However, there are still factors warranting caution in monetary policy conduct, the main ones being global trade tensions, a possibility that monetary policy decisions of leading central banks might deviate from market expectations in the coming period, as well as movements of oil prices and other primary commodities in the global market.

The Executive Board points out that the resilience of our economy to potential adverse effects from the international environment has increased owing to reduced internal and external imbalances and favourable macroeconomic prospects. As in the previous two years, public finances recorded a surplus in the first half of 2019 and the current account deficit was fully covered by the net inflow of foreign direct investment. The Executive Board expects that economic growth this year will be led by domestic demand, i.e. investment and consumption, and that foreign direct investment, which supports the expansion of our production and export capacities, will lead to the gradual narrowing of external imbalances in the medium term.

At today’s meeting, the Executive Board adopted the August Inflation Report, which will be presented to the public on 14 August. On that occasion, we will give a detailed account of monetary policy decisions and underlying macroeconomic trends.

The next rate-setting meeting will be held on 12 September.

Governor’s Office