On June 10,2014 the Operational Monetary Policy Committee of the NBRM held its regular meeting, at which it discussed the situation in the Macedonian economy and the counties in the region, the developments on the international and domestic financial markets and the latest macroeconomic indicators in the context of monetary policy setup
Skopje, 11 June 2014
On June 10,2014 the Operational Monetary Policy Committee of the NBRM held its regular meeting, at which it discussed the situation in the Macedonian economy and the counties in the region, the developments on the international and domestic financial markets and the latest macroeconomic indicators in the context of monetary policy setup.
The Operational Monetary Policy Committee finds the current monetary setup appropriate, thus deciding to preserve the current monetary setup and offer CB bills at the auction at the level of due amount (Denar 25,500 million), with unchanged interest rate at a level of 3.25%.
It was estimated that the economy continued to recover steadily, i.e. there are preconditions for private sector recovery without any additional monetary stimulus. Hence, it is assessed that the support to the domestic economy provided so far through the taken monetary policy measures is sufficient. The exit from the zone of accommodative monetary policy in the following period will depend on the changes in the external position of the economy and the effects on the foreign reserves. In this context, the latest decision of the European Central Bank on reducing the interest rate mitigates part of the potential risks for the external position of the domestic economy. With the changes in the interest rate of the central bank - anchor, the spread between the interest rate on the domestic currency and Euro increases, thus rising the attractiveness of the domestic currency, too.
At the Committee's meeting, the recent macroeconomic indicators were reviewed as well, and it was concluded that they do not indicate major changes in the environment for monetary policy conduct. The most recent indicators of economic activity in the first quarter show continuing favorable trends in the real sector, given the intensified activity in most of the key economic sectors. It was estimated that the economic recovery will proceed with a dynamics similar to the one given in the April projections. At the same time, the growth is still not expected to be strong enough to cause major imbalances in the economy, such as inflationary pressures and significant deterioration of the external position.
The latest inflation data in May 2014 show a small monthly rise in prices and deceleration of their annual fall. The increase in the core inflation, on annual basis, decelerates for eighth consecutive month. These developments, as well as the downward corrections in the expectations for some of the import prices, indicate inflationary pressures lower than expected. On the other hand, there are also upward risks for food and energy prices, which is associated with the conflict in Ukraine. New upward risk is the flooding that hit the region, which may lead to increase in the prices of certain food products. However, it is still assessed that the downward risks dominate in the balance of risks related to the inflation projection for 2014.
The latest available data on the foreign reserves show that they do not diverge significantly from the projected path. Since April, the foreign reserves declined moderately, which is consistent with the expectations for this period that part of the current account deficit will be covered by foreign reserves. The indicators of the reserves adequacy are still in the safe zone, i.e. indicate sufficient foreign reserves to cope with possible unforeseen shocks.
The preliminary data on the credit market for May 2014 show a significant acceleration of credit flows during the month and evident credit support to the corporate sector. The credit flows improved slightly than it was expected within the latest projections. On the other hand, the increase in the deposit base is moderate and somewhat weaker than expected. The behavior of banks on the credit market signalizes gradual improvement in the banks' expectations and their estimations regarding the risk profile of the credit demand. Moreover, these developments indicate, as well, existence of transmission effect of the monetary easing so far on the lending activity. However, in conditions of uncertain environment, there are still downward risks regarding the lending to the private sector. Accordingly, it needs time to evaluate the steadiness of the positive developments on the credit market.
Generally, the latest estimations of the NBRM do not indicate major changes in the environment for conducting monetary policy. It is expected that the indicators of adequacy of foreign reserves will remain in the safe zone. The inflation slows significantly, and its dynamics is due to the factors on the supply side. On the other hand, the new assessments confirmed the expectations for a gradual strengthening of the economic growth, while the realized and estimated developments on the credit market indicate the possibility of a gradual weakening of the downward risks associated with the dynamics of the lending activity.
The risks to the baseline macroeconomic scenario, as before, are mainly external and associated with possible changes in the recovery dynamics of the global economic growth. Other risk factor is considered the conflict-related developments in Ukraine, with the floods in the region posing also a new potential risk. The risks of these developments can materialize through the volatile energy and cereals prices, and can impact the expected economic recovery, as well, which requires constant monitoring of events.
At the global level, in early June the European Central Bank adopted a package of measures aimed at further easing of the monetary policy (by reducing the three policy rates), improvement in the transmission of loosen monetary conditions in the real economy (by introducing "targeted" long-term operations to support household and private sector lending) and reducing fragmentation of financial markets in the euro area (an announcement that in the following period the measure of outright purchase of asset-backed securities can be activated). At the same time, in line with the low inflation in May (0.5%), the European Central Bank revised the projection for 2014 downwards, expecting an inflation of 0.7% compared to 1.0% according to the March projections.
In the domestic economy, the bank's liquidity increased in May under the influence of the autonomous factors, with the banks still being interested in placing some of the excess liquid assets in short-term deposits with the National Bank. On the uncollateralized deposits market, the interbank trading reached the historical peak in terms of monthly amount, indicating a high degree of efficiency on this financial markets' segment, as well as confidence among market participants. On the foreign exchange market, the developments were influenced by the common seasonal factors.
The NBRM will continue to closely monitor the future macroeconomic developments and the possible materialization of the risks and it will adjust the monetary policy accordingly.