On 9 June 2015, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the Macedonian economy and the countries of the region, the developments on the international and domestic financial markets, and the latest macroeconomic indicators in the light of the monetary policy setup.
Skopje, 10 June 2015
Press release of the NBRM
The assessment of the economic and financial conditions showed that the current monetary policy setup is adequate and it was decided the CB bills offered at the auction to be in the amount that falls due (Denar 25,500 million), at an unchanged interest rate of 3.25%.
The economy has still 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 again 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.
The latest macroeconomic indicators do not point to major changes in the monetary policy setup. Observing economic activity, indicative high frequency data for the first quarter of 2015, point to continuing growth of the domestic economy, mainly perceived by data on the activity in the industrial sector and trade.
Inflation performance in May shows maintenance of positive annual growth rate for the second consecutive month, which reduces risks of a prolonged price decline. On average, in the first five months of the year, the general price level in the domestic economy shrank by 0.5% on an annual basis. The average annual decline of inflation in 2015 was mainly due to the lower prices in energy component of inflation. Inflation performance so far remains as projected. Recent assessments of external assumptions compared to the April projections indicate the possibility of a smaller decline in world oil price, while price pressures from global food prices are estimated as lower than previously expected. Frequent changes in the expectations about the prices of primary products indicate that the uncertainty about the future movement of these products is important, and the possibility of sudden changes in these categories is great.
According to the latest available data, in the period April-June 2015, foreign exchange reserves decreased, as expected with the April projections. The NBRM intervened in the foreign exchange market with small sales of foreign currency, as expected, considering the payment of dividends to foreign shareholders, typical for this time of year. Available external sector indicators for the second quarter are still insufficient to create an accurate picture of the position of the balance of payments compared with the projection. Recent foreign trade data in April give an indication of somewhat higher trade deficit, but the assessment period of one month is very short to provide reliable findings in this area. At the same time, net purchase of currency exchange operations as of the second ten-day period of May provides a signal for somewhat lower private transfers than expected for the second quarter according to the April projection. The analysis of foreign reserves adequacy indicators shows that they continue to move within a safe zone.
In May, liquidity of domestic banks reduced under the influence of autonomous factors, mostly as a result of increased demand for currency, amid payment of agricultural subsidies, and other seasonal effects. Banks have reduced the amount of placed short-term surpluses in deposits with the National Bank, while money markets registered increased trading activity and further reduction of interest rates.
Initial credit market data for May, show solid monthly growth of loans and accordingly, continuous favorable trends in this segment. The annual growth rate of total loans in May was 9.5%, which is above the projection for the second quarter of 2015. Regarding the deposit potential, in May, total deposits registered a monthly decline due to the decline of both corporate deposits and household deposits. Despite the monthly decrease in deposit base, typical for this time of year, total deposits kept on increasing annually, at an annual growth rate of 8.4%. However, the pace of deposit growth is still weaker compared to the April cycle projections.
In May, foreign exchange market developments were relatively stable and mainly related to dividend payments abroad. The banks met the need for foreign currency from their own sources, and the National Bank did not intervene with market makers. From the beginning of the year to May, foreign exchange market developments continued to improve annually. Total banks' net sale of foreign currency to clients was lower by about Euro 60 million in the first five months of the year compared to the net sales in the same period last year. This trend results primarily from the improved performances of the banks with the companies on the foreign exchange market i.e. higher foreign currency inflows from the exports of the new facilities operating within and outside the free economic zones, foreign currency inflows from capital infrastructure projects, as well as reduced outflow of foreign currency as a result of the lower oil price and lower import of electricity.
In the euro area, in May, the European Central Bank continued to purchase securities, thus improving the financial conditions. The annual inflation rate in May moved in a positive direction from 0% to 0.3%, with the projection being revised upward by the end of 2015. Negotiations between Greece and creditors continued, but the progress in reaching an agreement to meet short-term financial liabilities of the country is still accompanied by uncertainty. The situation in this country at the end of the month increased the volatility in international financial markets, with respect to yields on financial instruments and currency parities. Amid divergent performances of macroeconomic indicators in the United States, market participants remain focused on the timing of the first increase in interest rates by the Fed. According to officials of this central bank, monetary policy is expected to normalize by the end of the year if the economy continues to strengthen at the projected pace.
Generally, the latest NBRM's assessments do not point to major changes in the environment for conducting the monetary policy. Foreign reserves adequacy indicators remain within the safe zone. Economic growth is solid and there are no price pressures. Credit market developments have been generally favorable for a longer period of time, suggesting relatively efficient transmission of the monetary measures undertaken so far on the credit activity and more stable expectations of domestic banks. Under such economic conditions, in the period ahead, the NBRM will be mainly focused on monitoring the realization of the projected movement of foreign reserves and foreign exchange market developments and will adjust the monetary policy accordingly.
Risks in this period are a combination of external risks and risks caused by the domestic political developments. Observing external risks, concerns about Greece's debt crisis were again brought to the fore in this period, which stresses the present uncertainty in the environment. Analyzing domestic risks, although so far no adverse effects of these developments on the economy has been registered, certain preliminary indicators give unfavorable signals, suggesting a need for greater vigilance and close monitoring of all developments.
The NBRM will continue to monitor closely the future macroeconomic developments and the possible materialization of risks and will adjust the monetary policy accordingly.
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