Today, the National Bank of the Republic of Macedonia Council held its session, at which the Quarterly Report and the Macroeconomic Projections to the end of 2017 were adopted, where it was confirmed that the quarterly performances in the first quarter of 2017 point to a similar macroeconomic picture as in the previous, October projections. The process of monetary policy normalization which started in December 2016, also continued during January and February 2017, when the key interest rate was additionally reduced for a total of 0.50 percentage points, which was reduced to 3.25%. As a result to that, the key interest rate was reduced on the level prior May 2016, when the monetary policy was tightened, as a reaction to the pressures caused by speculations.
The foreign effective demand was revised upwards for 2017, whereas a minor downward correction was conducted in 2018. Previous performances, as well as the expected economic growth and the growth of global primary product prices led to a significant upward correction of the foreign effective inflation in 2017, whereas expectations for 2018 remained unchanged. In terms of price movements of primary products, in 2017, higher growth in the prices of energy, food and most metals is expected compared to the October projections, whereas in 2018, further growth of food product prices and stabilization of other primary products prices, because for most primary product the expectations for 2018 are similar to those in October. Maintaining the domestic economy growth trend during 2017 and in 2018 is largely based on these expectations.
The GDP growth of 2.4% in 2016 was in accordance with the previous expectations, whereas for 2017, growth of 2.5% is expected, and 3.2% in 2018. Cumulatively, and within this projection cycle, in the period 2017-2018, export remains the growth driving factor of the economy, with a contribution which is more pronounced compared with the previous expectations. On the other hand, changes were made in the structure of the domestic demand, primarily for 2017, when it was expected that the economy was still stimulated by private consumption, whereas the investment activity will continue to decrease, but at a moderate pace, contrary to the previous expectations. However, in 2018, a solid growth of investments is expected. The contribution of the public consumption on the economic growth in 2017 and 2018 is expected to be neutral on average.
The credit activity of the banking sector during 2017 and 2018 is expected to support the economic growth. In 2017, it is expected to amount to 5.6% and 6.7% in 2018. Assessment for credit growth acceleration in 2018 are based on the expectations for a more stable environment and growth of the deposit base, which in conditions of favorable capital and liquidity positions of banks will make room for an increased credit funding.
After the moderate price reduction in the previous three years, in 2017 and 2018 a gradual normalization of inflation to 1.3% and 2%, respectively, is expected, due to the fact that compared to the previous projection cycle, no changes were done. Assessments for inflation growth reflect the current expectations for the growth of global prices of food and energy and higher foreign effective inflation. Positive effect on inflation is also expected from the domestic demand, in conditions when the output gap is being estimated as moderately positive during the entire forecast horizon.
The latest assessments on balance of payments point to a current account defficit for the period 2017-2018, which, on average is insignificantly more moderate compared to the expectations within the October projection and amounts to 2.3% of GDP. In terms of the financial account, funding of the current account during this two-year period is expected to be provided through non-debt and debt financial flows i.e. foreign direct investment and borrowing abroad. In the period 2017-2018, the current account deficit is expected to be fully covered by financial flows, which will ensure additional increase in the foreign reserves. Thus, during the entire forecast horizon, foreign reserves adequacy indicators have ranged within the safe zone.
Altogether, performances show that despite the increasing endogenous and exogenous risks in this period, the assessments for the domestic economy fundamentals remain solid. The economy further recovers without price pressures and in conditions of further maintaining an adequate level of foreign reserves. Some of the adverse risks from the previous period continue to be present. During the following period, the National Bank will continue to carefully monitor the developments and in accordance with its competences will be able to support that recovery.
At today's session, the Council adopted the Strategic Plan of the National Bank of the Republic of Macedonia for the period 2018-2020. The Strategic Plan for the period 2018-2020 contains ten strategic objectives which, same as in the previous year, clearly expresses the National Bank's commitment for maintaining low and stable inflation through the strategy of maintaining a stable exchange rate of the denar against the euro, maintaining financial stability as an integral element of macroeconomic stability and precondition for achieving economic growth and prosperity. Furthermore, given the dynamic and volatile environment, within the Strategic Plan, the key challenges in the operations are developed, as well as the most important, critical points of action during the following three-year period. The established strategic objectives are a basis for the preparation of organizational unit plans and the Plan of Activities of the National Bank for the follwoing year.
The Council also discussed other matters within its jurisdiction.
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