On 10 March 2015, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the Macedonian economy and the countries in the region, the developments on the international and domestic financial markets and the latest macroeconomic indicators
On 10 March 2015, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the Macedonian economy and the countries in the region, the developments 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 current monetary setup of the main instrument 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. Regarding the economic activity, high frequency data for the last quarter still point to further growth of the domestic economy, probably at a similar pace as in the previous quarter.
The continuation of the economic growth in the last quarter is evident in most of the indicators by sector, including the data on construction, which after the six-month decline, in December increased significantly and again entered the zone of positive annual changes. Movements in the indicators of economic activity registered so far, suggest the possibility of a slightly faster than expected growth in 2014.
In terms of inflation, in the first two months of 2015, the trend of falling general level of prices in the domestic economy continued, on average by 1.2% annually. The average annual reduction of inflation in 2015 is a result of all three components of inflation, but dominant is the contribution of the lower prices in the energy component of inflation, in accordance with the decline in world oil prices. Amid second-round effects of the fall in the prices of food and energy, downward movements were registered also in core inflation, which has been in the zone of negative annual change, for the sixth month in a row. However, the analysis of the dynamics suggests that the decline in inflation gradually slows (annual rate of 1.5% and 1% in January and February, respectively), which largely reflects the gradual exhaustion of the negative effects in the basic component of inflation. Inflation is slightly lower than projected, and changes in external assumptions still point to downward risks to the inflation projection for 2015. These assessments reflect the March revisions to the world oil price, which envisage significantly sharper decline in the oil price in 2015 compared with the October projection. However, one should bear in mind the great uncertainty about the future movements in world oil prices and the possibility of sudden changes in this category. Also, in the meantime, upward risk factors appeared, i.e. adverse weather conditions in the domestic economy, but for the time being it is difficult to assess their effect accurately.
The latest data on foreign reserves show a decline since the beginning of the year, due to the early repayment of the loan from the IMF, used within the Precautionary Credit Line. If this effect is excluded, foreign reserves register a slight decline, which is in line with the October projection, and foreign reserves adequacy indicators further point to a sufficient level of foreign reserves to cope with possible, unforeseen shocks. However, the risks regarding the future movement of foreign reserves remain, and are mainly related to the unfavorable external environment.
Regarding the credit market, the preliminary data for February point to a slight increment in the loans on a monthly basis, following the slower credit growth registered in January 2015. The monthly growth in loans results from the increased lending to households, although moderate growth was registered also in the loans to the corporate sector, after their decline in the previous month. The annual growth rate of total loans in February was 9.2%, which is above the projection for the first quarter of 2015, due to the fast credit growth in the last quarter of 2014. Regarding the deposit potential, total deposits continued to grow at the same pace as in January, whereby their annual growth dynamics in February was also beyond the expectations for the first quarter, as part of the October projection.
Liquidity of banks increased under the influence of autonomous factors, where banks still showed increased interest in investing excess liquidity in instruments of the National Bank. Trading on the money market increased and interest rates declined moderately, with the market participants trading also on the secondary securities market. Developments on the foreign exchange market were stable and under the influence of common seasonal factors.
Regarding the banks' standing deposits placed with the National Bank, it was ascertained that the trend of growth in overnight deposits and seven-day deposits registered in the last few months, continues. The banks keep on placing relatively high amounts of funds in these instruments, which is uncommon for their main function of providing flexibility in managing short-term excess liquidity within the period of the reserve requirement. Therefore, the Committee decided to reduce the interest rates on these two instruments from 1.00% to 0.50% for the seven-day deposits and from 0.50% to 0.25% for the overnight deposits.
Performances and indications of economic activity of the euro area are still marked by a moderate economic growth. Following the decision of the European Central Bank to expand the program for purchasing securities, the liquidity in the euro area is expected to increase in the forthcoming period, in order to encourage lending activity. The discussions between Greece and the euro area led to extension of the current program for financial assistance for additional four months. Across the Atlantic, macroidicators continue to point to a sustainable economic growth, as a precondition for normalization of the monetary policy by raising interest rates.
Generally, the latest NBRM's assessments indicate a stable environment for conducting the monetary policy. Foreign reserves adequacy indicators are expected to remain in the safe zone. Economic growth is solid and there are no price pressures. Movements in the credit market have been generally favorable for a longer period of time, despite their variability in individual months, suggesting relatively efficient transmission of the monetary measures undertaken so far on the credit activity and more stable expectations of domestic banks.
Under such favorable 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. As before, the risks to the baseline macroeconomic scenario are mainly of external nature and are associated with possible changes in the pace of recovery of the global economic growth and the volatile and uncertain dynamics of the world food and energy prices, which has been rather pronounced lately. Poor weather conditions in the country pose an additional risk, which may adversely affect some of the domestic production and prices.
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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