On July 8, 2014 the Operational Monetary Policy Committee of the NBRM held its regular meeting, at which it discussed the situation in the banking sector, the developments on the international and domestic financial markets and the latest economic indicators
Skopje, 9 July 2014
On July 8, 2014 the Operational Monetary Policy Committee of the NBRM held its regular meeting, at which it discussed the situation in the banking sector, the developments on the international and domestic financial markets and the latest economic indicators, in the context of the monetary policy setup.
The assessment of the economic and financial conditions showed that the current monetary setup is 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%. The inflation is maintained low, while the economy continues to recover soundly, thus indicating existence of preconditions for recovery of the private sector also without additional monetary stimulus, estimating that the support to the local economy so far provided by taking 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.
At the Committee's meeting, the recent macroeconomic indicators were reviewed as well, which, as concluded, do not indicate major changes in the environment for monetary policy conduct. According to the latest data, the economic activity for the first quarter registered a solid growth rate of 3.9%, slightly stronger than anticipated. Moreover, recent indicators in the real sector point to continuation of the favorable trends in the second quarter of the year, whose dynamics is similar to the estimations in the April projections. The growth is still not expected to be strong enough to cause major imbalance in the economy, such as inflationary pressures and significant deterioration of the external position.
The latest data on the inflation in June 2014 showed amplified annual price drop (from -0.6% in May to -1.1% in June). The growth of core inflation on an annual basis has stabilized at the level registered in May (0.7%, annually). These developments, as well as the downward adjustments in the expectations for some import prices, indicate inflationary pressures that are lower than expected. On the other hand, there are also upward risks, such as the imminent increase in energy, bread and tobacco prices in July, as well as risks associated with global energy prices (due to geopolitical tensions in Iraq and Libya) and food prices (because of the possible effects of the flooding in the region). However, we find that in the balance of risks, in terms of the projected price movements, the downward risks are still dominant. According to the latest available data, the foreign reserves registered a decrease, which is larger than the one projected for the second quarter, but analyzed through the foreign reserves adequacy indicators, they continue to move in a safe zone, i.e. indicate a sufficient level of foreign reserves to cope with possible unforeseen shocks.
The data on credit market for May 2014 show a significant acceleration of credit flows during the month, mostly directed towards the corporate sector. The credit flows are somewhat better than expected within the latest projections. On the other hand, the growth dynamics of the deposit base is moderate and slightly weaker than expected. The behavior of the banks on the credit markets signalized gradual improvement in the banks' expectations and their assessments of the risk profile of the credit demand. Moreover, these developments indicate also the transmission effect of the monetary easing so far on lending. However, given the uncertain environment, the downward risks associated with the lending to the private sector are still present, because of which it needs time to evaluate the consistency of the positive developments on the credit market.
Generally, the latest assessments of the NBRM do not imply major changes in the environment for conducting monetary policy. It is expected that the foreign reserves adequacy indicators will remain in the safe zone. The inflation significantly slows, the economic growth is solid, while the realized and estimated developments on the credit market suggest possible gradual weakening of the downward risks associated with the dynamics of lending activity. Under such favorable economic conditions, in the next period the NBRM will be mainly focused on monitoring the achievement of the projected path of foreign reserves and the exchange market developments and will adjust monetary policy accordingly.
As before, the risks to the 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 the global energy and food prices. The effects of the events related to the conflict in Ukraine, the floods in the region, as well as the emerging developments in Iraq and Libya remain to be considered as risk factors. The risks of these developments can be materialized through instability of fuel prices and cereal products, and may also affect the expected economic recovery, which requires constant monitoring of events.
At global level, in July the ECB announced the detailed features of the new instrument (targeted long-term refinancing operations), whose application is expected to contribute to improved transmission of the eased monetary conditions in the real economy and reduce the financing cost of both the banking and the corporate sector. In terms of the U.S. economy, after the fall in the activity in the first quarter of the year, the high-frequency indicators point to improved performance in the second quarter, with the continuous improvement being registered by the labor market, as well.
In the domestic economy, the banks' liquidity in June remained stable, and the banks were using the deposit facility with the National Bank for overcoming the short-term liquidity fluctuations influenced by the autonomous factors. In June, the banks were actively trading on the uncollateralized deposits market, with moderate trade activity being also registered on the secondary market. On the foreign exchange market, the movements were influenced by the usual 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.