Today, the National Bank of the Republic of Macedonia Council held its first session at which the latest Quarterly Report was discussed and the most recent macroeconomic projections were presented.
Today, the National Bank of the Republic of Macedonia Council held its first session at which the latest Quarterly Report was discussed and the most recent macroeconomic projections were presented.
During the last quarter of 2012, monetary conditions remained unchanged, so that the maximum interest rate on CB bills auctions was maintained at the level of 3.75%. The policy was somewhat relaxed through the reserve requirement, but it targeted only banks with credit activity directed toward sectors whose growth reduces the external vulnerability of the economy. In the last quarter, data on inflation showed a slowdown in domestic prices growth, which together with downward revisions to the estimates for the future growth of import prices indicated lower risks for domestic inflation. Interventions of the NBRM in the foreign exchange market continued with purchase of foreign currency, so that foreign reserve adequacy ratios remain favorable with assessments for a relatively comfortable level for absorbing potential unexpected shocks. Economic activity indicators showed a slight improvement, but still insufficient for a sound and sustainable economic recovery. Amid relatively weak economic performance and deterioration of the loan portfolio quality, lending to the private sector slowed significantly. In circumstances when December data on inflation and movements in the foreign exchange market in the second half of December indicated retained favorable performances, in the beginning of January 2013, the NBRM decided to reduce the maximum interest rate by 25 basis points.
Recent macroeconomic projections confirmed the possibility for more relaxed monetary policy, given the estimates of lower inflation in the next two years and a greater capacity to create foreign currency inflows through the balance of payments, while simultaneously experiencing moderately weaker economic growth and slower credit flows compared to the previously expected.
Amid continuous prolongation of the debt crisis in the Eurozone and further maintenance of the environment of uncertainty and inherent risks, the new balance of payments projections do not imply greater deterioration of the external position. Latest estimates for 2012, indicate that the current account deficit would equal 3.2% of GDP, contrary to previous expectations of 2.8%, partly due to factors with a one-time character on the import side. In 2013 and 2014, expansion of the current account deficit is expected (3.8% of GDP and 5.4% of GDP). The worsening of the deficit in 2014 is a result of the assessment for higher imports in 2014, which are mainly due to the announced investment flows. Current account deficit is expected to continue to be financed by capital inflows, which would provide further growth of foreign reserves.
As a result of the deteriorated economic outlook of the Eurozone, it is expected that the recovery of the domestic economy will take a slightly more moderate pace than previously expected, until mid-2014. The most recent indicators of economic activity point to stagnation in 2012 and gradual economic recovery over the next two years. It is expected that the global environment will be stimulating, i.e. it will contribute to the gradual revitalization of the export sector and will encourage domestic investors, which together with the expected impetus from public and foreign investment would lead to amplification of the investment cycle and its retention throughout the entire time horizon of the projections. Given such assumptions, in 2013 and in 2014 GDP is expected to grow by 2.2% and 3%, respectively, supported by domestic demand growth and a negative contribution of net exports.
Domestic demand in 2013 and 2014 will be additionally financed through lending by banks. It is expected that the stabilized environment, deposit growth, and relaxation of the monetary policy at the beginning of January, will provide a moderate acceleration of total loans growth of 7.5% in 2013 and 8.1% at the end of 2014.
Latest macroeconomic projections indicate a decrease of the inflation risks, due to which a downward revision of the inflation projection for the next two years was made. Amid slower inflation growth in the period between the two projections and downward revision of the estimates for the import prices in the next two years, the expected average inflation for 2013 has been revised downwards from 3.5% to 3.2% and for 2014 from 2.6% to 2.3%.
In general, the new NBRM projections indicate relatively stable inflation outlook, favorable external position, with the capacity to create new foreign exchange inflows and growth of foreign reserves, gradual, but still slow economic recovery and a small growth of credit activity. The risks are still present and to a large extent contingent upon the fulfillment of the assumptions arising from the external environment. The possible deterioration of the economic outlook for the European economy and restoring investor' lack of confidence may act as a limiting factor for achieving the projections for export growth and capital inflows.
At today's session, the National Bank Council adopted the Decision on amending the Decision on deposit facility by which the interest rate on the overnight deposit facility with the NBRM was adjusted in accordance with the last reduction in other interest rates of the National Bank. Thus, the interest rate on overnight deposit facility was reduced by 0.25 percentage points, i.e. from 1.0% to 0.75%.
At today's session, the Council also discussed other issues within its jurisdiction.