On 9 September 2014, the NBRM's Operational Monetary Policy Committee held its regular meeting and reviewed the situation in the Macedonian economy and the countries in the region, the movements on the international and domestic financial markets and the latest macroeconomic indicators in the light of the monetary policy setup.
Press release of the NBRM
On 9 September 2014, the NBRM's Operational Monetary Policy Committee held its regular meeting and reviewed the situation in the Macedonian economy and the countries in the region, the movements on the international and domestic financial markets and the latest macroeconomic indicators in the light of the monetary policy setup.
The assessment of the economic and financial conditions showed that the existing monetary setup is adequate and it was decided to offer CB bills in the amount that falls due (Denar 25,500 million) at the auction, at an unchanged interest rate of 3.25%. In order to further channel banks' excess liquidity to the non-financial private sector, the Committee revised the mechanism for transfer of the demand for CB bills, which is above the banks' potential, into another instrument (standing deposit facility with a 7-day maturity).
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 indicate that there is a suitable environment for a sustained recovery of the private sector, and it was assessed that the current support of the local 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.
Recent indicators of the economic activity suggest that, in line with the expectations, the domestic economy continues to grow also in the second quarter, with some of the key sectors (industry and trade) possibly achieving better results compared with the first quarter. Data as of July suggest retention of the positive economic trends also in the third quarter. It is still assessed that the dynamics and structure of the economic growth will not cause major imbalances in the economy in the form of inflationary pressures and significant deterioration of the external position.
The latest data on the inflation in August 2014 show a small monthly decline in the general level of prices, mainly due to the lower energy prices. In such conditions, the annual inflation rate in August again was moderately negative and equaled -0.5%, after the moderate growth registered in the previous month (0.3%). Inflation as of August 2014 was slightly lower than expected with the April projection. The latest expectations for import prices imply lower than expected inflationary pressures. 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 conflict in Ukraine, as well as the possible effects of the flooding in the region). However, it is estimated that the balance of risks around the projected price movement is still predominated by downward risks.
At the beginning of September, compared to the end of the second quarter, foreign reserves increased, mainly as an effect of the external government borrowing on the international capital market, and the disbursement of funds from the World Bank's Competitiveness Development Policy Loan. At the same time, even if the effect of government borrowing is excluded, foreign reserves registered a moderate growth due to the favorable trends on the foreign exchange market and the NBRM interventions with purchasing of foreign currency. Thus, changes in foreign reserves are within the projections, and foreign reserves adequacy indicators further indicate a sufficient level of foreign reserves to cope with possible, unforeseen shocks.
Preliminary data for August point to a solid pace of annual growth in total loans, and the dynamics of the lending activity is in line with the projections. However, as in the previous month, a moderate monthly increase was registered also in August. According to the Lending Survey conducted in July, banks have favorable expectations for the third quarter, assessing higher supply of and demand for loans. After the moderate growth in July, preliminary data as of August point to solid growth in deposits and reduced downward deviation relative to the projection. Movements in the credit market signal more stable expectations and knock-on effects of the monetary loosening on lending. However, given the uncertain environment, there are still downward risks about lending to the private sector, although less pronounced.
Liquidity of banks increased under the influence of autonomous factors, where banks invested excess liquidity in short-term financial instruments. The turnover on the domestic money markets remained relatively stable, with an increased interbank trading by concluding repo transactions being registered. On the foreign exchange market, amid higher supply than demand registered also during this month, the National Bank intervened by purchasing foreign currency from the market makers.
Globally, there is still a divergent picture on both sides of the Atlantic, with the macroeconomic indicators for the United States remaining favorable, contrary to the weak economic activity in the euro zone. In response to the weak economic indicators and low inflation, at the regular meeting held in September, the ECB decided to reduce the interest rate on refinancing operations (from 0.15% to 0.05%), the interest rate on overnight credits (from 0.40% to 0.30%) and the interest rate on overnight deposits (from -0.10% to -0.20%). The vulnerability of the euro region to the low inflation and the Ukrainian crisis remain major risks for the euro area.
Generally, the latest NBRM's assessments do not point to 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 on 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, the economic growth is solid, while the credit market movements suggest more stable expectations and possibility of a gradual weakening of the 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 achievement of the projected path of foreign reserves and foreign exchange market developments and will adjust the monetary policy accordingly. As before, the risks to the baseline macroeconomic scenario are mainly of external nature and associated with possible changes in the pace of recovery of the global economic growth and the rise in world food and energy prices. Weaker than expected performances in the euro zone highlight the risks regarding the dynamics of global recovery. The effects of the events related to the conflict in Ukraine, the floods in the region, and the geopolitical tensions in Iraq continue to be risk factors. The risks of these developments could materialize through instability and hard predictability of the prices of fuel and cereal products, 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 the monetary policy accordingly.