On 12 August 2014, the NBRM's Operational Monetary Policy Committee held its regular meeting and reviewed the situation in the banking system, the movements in international and domestic financial markets and the latest economic indicators in the light of the monetary policy setup
Skopje, 13 August 2014
On 12 August 2014, the NBRM's Operational Monetary Policy Committee held its regular meeting and reviewed the situation in the banking system, the movements in international and domestic financial markets and the latest economic 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 lending of the 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 assessed that the support for the domestic economy through the monetary policy measures is sufficient. Leaving the zone of accommodative monetary policy in the period ahead will depend on the changes in the external position of the economy and the effects on foreign reserves.
In the meeting, the Committee also reviewed the recent macroeconomic indicators, which suggest no major changes in the environment for conducting monetary policy. Recent indicators of economic activity suggest retention of favorable trends and opportunities to achieve solid economic growth in the second quarter of the year. Favorable shifts are observed in most key sectors, so that there are still no expectations for greater deviation of the dynamics of growth projected in April. It is still assessed that the dynamics and structure of economic growth will cause no major imbalances in the economy in the form of inflationary pressures and significant deterioration of the external position.
The latest data on inflation in July 2014 show moderate monthly growth, largely due to one-off factors (increase in electricity prices and cigarette prices due to the increase in excise duty). These developments, along with the stabilization of the base effect, contributed to a small annual price growth of 0.3% after the constant quarterly decrease. Although the annual inflation in July was somewhat lower than expected in the April projection, the gap between the actual and projected annual inflation narrowed. The latest expectations for import prices indicate inflationary pressures lower than expected. Lower initial conditions and revisions of external input assumptions point to downward risks to the inflation projection for 2014. On the other hand, there are also upward risks about the energy and food prices (related to the geopolitical tensions in Iraq, the Russian - Ukrainian conflict, and the possible effects of flooding in the region). We consider that the balance of risks around the projected price movement is still predominated by downward risks, though less pronounced than in the previous period.
The credit market data for June 2014 show retention of solid growth of loans to the private sector. The credit flows are slightly better than expected under the latest projections, while the pace of growth of the deposit base is moderate and slightly weaker than expected. These conclusions are further supported by the preliminary monetary data for July, which still show some slowdown of the monthly credit growth relative to the previous two months. According to the Lending Survey conducted in July, banks have favorable expectations for the third quarter, assessing higher supply of and demand for loans. Movements in the credit market signal stable expectations and knock-on effects of the monetary loosening on lending. However, under uncertain circumstances, there are still downward risks about lending to the private sector, although with the recent performances, they are less pronounced.
In July, banks' liquidity increased under the influence of autonomous factors and reduced attraction for banks in short-term deposits with the National Bank. To overcome liquidity fluctuations within the period of the reserve requirement, banks actively traded on the money markets, whereby the turnover of the market of unbacked deposits hit record high, and there was trading on the secondary securities market. At the foreign exchange market, given the seasonally higher demand for than supply of foreign currency, the National Bank purchased foreign currency from the market makers.
At the beginning of the third quarter of 2014, the foreign reserves increased, mainly as an effect of the external government borrowing from the international capital market, and the disbursement of funds from the World Bank's Competitiveness Development Policy Loan. At the same time, if we exclude the effect of government borrowing, foreign reserves register moderately growth given the favorable trends in the foreign exchange market and the NBRM purchase of foreign currency. The changes in foreign reserves are as projected, while foreign reserves adequacy indicators further mark a sufficient level of foreign reserves to deal with any unforeseen shocks.
At the global level, macroeconomic indicators suggest that the U.S. economy is on a sustainable path to economic recovery. On the other hand, the recovery of the euro area is taking place at a slower pace, while the low inflation in July again encourages debate about deflation risks.
Generally, the latest NBRM's assessments indicate no major changes in the environment for conducting monetary policy. The foreign reserves adequacy indicators are expected to remain in the safe zone. Moreover, given the government borrowing from the international capital market, which was not incorporated in the last projections, adequacy ratios for 2014 will be better than expected. There are no price pressures, economic growth is solid, while the credit market developments indicate the possibility of a gradual weakening of downward risks associated with the dynamics of lending activity. Under such favorable economic conditions, in the period ahead, the NBRM will be mainly focused on monitoring the performance of the projected path of foreign reserves and foreign exchange market developments and will adjust monetary policy accordingly.
As before, the risks to baseline macroeconomic scenario are mainly of external nature and associated with possible changes in the dynamics of recovery of the global economic growth and the rise in global food and energy prices. The effects of the events related to the conflict in Ukraine, floods in the region, as well as the developments in Iraq continue to be risk factors. The risks of these developments could materialize through instability and low predictability of fuel 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.