On 11 July 2017, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the domestic economy, the developments on the international and domestic financial markets and the indicators of the domestic economy in light of the monetary policy setup.
On 11 July 2017, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the domestic economy, the developments on the international and domestic financial markets and the indicators of the domestic economy in light of the monetary policy setup.
At the Committee's meeting, the existing monetary setup was evaluated as appropriate to the current economic conditions. The Committee concluded that most indicators important for the monetary policy are favorable and do not deviate from the expectations, however there are points where certain vigilance is required. Thus, particularly important are the currency market developments that are stable, seasonal and without pressures, and the foreign reserves indicators remain at an adequate level. In such conditions of uncertainty and risks, the CB bills interest rate was maintained at an unchanged level of 3.25%.
At the meeting, the Committee made a regular review of the banks' liquidity trends in the context of the decisions on the offered amount and interest rate of the CB bills. Moreover, it was concluded that since early March (when due to the significant increase in the excess denar liquid assets of banks, the amount of CB bills increased from Denar 25,000 to 30,000 million) to the end of the first ten days of June, the banks’ liquidity potential reduced, and this trend is expected to continue in the upcoming period of reserve requirement. Considering the decline in the banks' liquidity, at the meeting, the Committee decided to reduce the amount of CB bills accordingly. In this light, the Committee decided Denar 27,500 million to be offered at the CB bill auction, which will be held on 12 July, that is, by Denar 2,500 million less compared to the due amount.
Analyzing specific economic indicators, after the stagnation of the economic activity in the first quarter, the high frequency indicators for the second quarter point to improvement in the economy. This conclusion is supported by the growth of industrial output, after its decrease in the first quarter, the slower decline in construction activity, and the acceleration of growth in trade. However, the available high frequency data for the second quarter are limited, so it is difficult to form a precise assessment regarding the pace of activity in this quarter. Regarding the forecasted path to the end of the year, the lower performances in the first quarter create downward risks to the GDP forecast of 2.5% for the whole of 2017.
June inflation data suggest moderate acceleration of the annual inflation rate to 1.5%, while the average annual price growth in the first half equals 0.9%. These performances are primarily due to core inflation, and less to energy prices. Food prices continue to make negative contribution to the average price change, which is gradually declining. Performances in inflation are mainly in accordance with the forecast, and the input assumptions for the primary commodity import prices are mainly downward, yet extremely volatile. In such conditions, risks surrounding the average inflation forecast for 2017 (1.3%) are assessed as balanced.
Analyzing the external sector, foreign reserves data for the second quarter show a decline relative to the end of the first quarter, which was expected, and the general assessment of future movements does not point to larger deviations than expected. Thus, all foreign reserves adequacy indicators show that they constantly hover in a safe zone. The number of available external sector indicators for the second quarter is small, and so far show more favorable developments than expected. This conclusion primarily refers to the currency exchange market as of the second ten days of June, while the foreign trade data for the April-May period point to a trade balance that is in line with the forecasts. However, the restricted number of data and the volatile seasonal dynamics are a limiting factor for making reliable conclusions about the expectations for the external sector indicators for the entire quarter.
In June, against the backdrop of further implementation of agricultural subsidies, the government transactions increased banks' liquidity, whose effect was largely offset by the increased demand for denar cash by the households. The foreign exchange market was marked by relatively high demand for foreign currency by banks' clients, due to the seasonally higher demand for foreign exchange liquidity of the companies for regular operations, dividend payments to legal entities in dominant foreign ownership and the private sector deleveraging to abroad. Banks primarily met the increased demand for foreign currency using their own funds, while the residue was provided by the National Bank, which intervened with the sale of Euro 36.4 million to market makers.
During this month, banks actively traded in the money markets, and the excess funds on their accounts continued to be invested in deposit facilities with the National Bank.
Preliminary ten-day data as of June 2017 show an increase in total deposits on a monthly basis, as opposed to their decrease over the previous five months. The monthly growth was mostly due to the increase in household deposits, while corporate deposits made moderate contribution to the monthly growth. The level of total deposits is below the forecasts for the second quarter, but this gap gradually narrowed during the quarter. In June, credit activity continued to grow at a steady pace, with growth of credit support both to the corporate and to the household sectors. The level of loans at the end of June is above expectations.
At the last meeting in June, Fed made a decision to tighten the monetary policy as expected and details were given regarding the plan to normalize the Fed's balance sheet. However, the biggest impact on international financial markets was made by the speech of the ECB President, Mario Draghi, at the ECB Central Banking Forum in Portugal, expressing optimism about the recovery of the euro area economy. Also, other major central banks spoke in a more restrictive tone. Against such background, there was an appreciation of the euro and growth in the government securities yields in the euro area, as well as in the United States.
In summary, at the meeting it was concluded that the continuous economic and financial conditions and risks suggest that the current monetary setup is appropriate. The external position, viewed through the foreign reserves performance, is within the expectations and shows retention of the sound economic fundamentals. This is also indicated by credit flow data, while savings performances in June provide favorable signals and gradual approximation to the forecasts.
In the coming period, the National Bank will closely monitor all economic indicators and developments in the domestic economy, while the future changes in the monetary policy will greatly be conditioned upon the developments in the domestic economy and the external sector.
Governor's Office
National Bank of the Republic of Macedonia