The recent redesign of monetary instruments and the yesterday’s cut of reference CB bills interest rate from 4% to 3.75% are aimed towards conducting of policy at optimal level of reference interest rate. Allow me to elaborate. We were preparing the monetary instruments redesign for a longer time period, and made the actual redesign when we considered that the time was right. The economic activity decelerates because the euro area demand is lower and the credit growth rate is below expectations. Moreover, data on the foreign exchange market and foreign reserves and on the trade deficit in the first quarter indicate balance of payments deficit lower than projected. The inflation rate reduced to around 2%, as expected for this year’s average. The banks, instead of investing the household savings, that increase faster than expected, in lending, purchased CB bills, the amount of which increased by Denar 10 billion, i.e. one third in only three months, even though the capital adequacy and liquidity are at exceptionally high levels. The net external borrowing of the country decreased by Euro 220 million only in the last quarter of the last year, and by Euro 280 million, or by one fourth, over the entire last year. Finally, immediately prior to our decision to redesign the monetary instruments, the Ministry of Finance announced cut of budget expenses by 5%.
To summarize, we face low level of risk in the external and the banking sector, low to moderate level of risk in the public sector, the Denar exchange rate is stable, the inflation is lower than in the euro area, and the economic activity decelerates. What would be more suitable in a situation like this than to send signal that there are conditions for enhanced banking activity without jeopardizing the stability? This is exactly the goal of our measures. It is not our intention just to conclude that the credit growth does not develop as expected, and to revise the rate downward all over again. We consider that the credit growth could range around 7–8% without jeopardizing price and financial stability, and we clearly signalize this. BIS central bankers’ speeches  1  The question is whether the banks will follow our signal? The promptness and intensity of banks’ response depend on the power of monetary policy transmission. The recent researches conducted by my coworkers show that the power of monetary policy transmission in our banking system is limited. This was yet another reason to redesign the monetary policy instruments. We hope that the new monetary framework will improve the monetary transmission. Otherwise, we will keep on advancing the monetary instruments setup. CB bills are the National Bank basic instrument used to absorb excess liquidity by banks. CB bills are not investment vehicles. In many countries there are no CB bills.