On 14 August 2018, the NBRM's Operational Monetary Policy Committee held a regular meeting and discussed the key domestic economy indicators and the developments on the international and domestic financial markets in the context of the monetary policy setup.
Based on the assessment of the existing economic and financial conditions, as well as the existing risks, the Committee assessed that there is room for monetary policy easing. At the session, a decision was made to cut the policy rate by 0.25 percentage points to 2.75%. The offer of treasury bills remains unchanged (Denar 25.000 million). The interest rate cut reflects the continuous favorable movements on the foreign exchange market, which show a solid external position and stable expectations of economic agents. Movements in the deposit base of banks are also favorable, which is also a signal for stable expectations and confidence. In general, at this session, the Committee retained the perceptions of sound economic fundamentals and absence of imbalances.
Comparison between the latest macroeconomic indicators of the domestic economy and their dynamics forecast in April indicates deviations in some economic segments. Downward deviations from the expectations were registered in the growth performance in the first quarter. However, after the minor economic growth in the first quarter, the available high frequency data for the second quarter point to favorable shifts in the key economic indicators. Industrial activity continued to grow at solid growth rates, trade growth moderately accelerated, while the value of completed construction works continued to decrease, but at significantly slower pace. The second quarter witnessed an improvement in the economic sentiment indicator.
Regarding the inflationary movements, in the period January-July, the average annual growth rate of the consumer prices was 1.5%, which is a downward deviation from the April forecast. Amid upward revision of external input assumptions in the inflation forecast and lower inflation than forecast, it was assessed that risks surrounding the inflation forecast of 2% for 2018 are balanced.
The latest foreign reserves data show an increase compared to the end of the previous year, largely due to the NBRM’s net purchase of foreign currency. Movements in the foreign reserves are slightly higher than expected with the April forecast, and the analysis of adequacy indicators show that they are still maintained in a safe zone. The available external sector indicators are currently limited. The foreign trade data for the period January - June indicate a trade deficit that does not deviate significantly from the forecasts, while the available currency exchange market data show higher net inflows.
Initial monetary developments data for May show continuous growth in both deposits and loans. The deposit base registered accelerated monthly growth, with greater contribution made by corporate deposits, followed by increased household savings. Credit market also registered positive movements on a monthly basis in July, given the higher lending to households. In the period April-July, the deposit and loan performances are higher than expected for this period.
In the period between two monthly meetings of the Committee, the liquidity in the banking system moderately increased. Namely, the decreased bank liquidity caused by the seasonally higher demand for denar cash by the households in July was offset by the NBRM’s issue of liquidity from the purchase of Euro 56.5 million from the market makers. The high amount of purchased foreign currency is due to the continuation of favorable movements on the foreign exchange market at the beginning of the year and July. Thus, in the foreign exchange market, the banks registered a continuously higher supply of, than demand for, foreign currency in the transactions with clients, with the supply being higher in the corporate sector. In addition, banks also registered high supply in transactions with exchange offices, which is usually a seasonal movement in the period of annual vacations, but with a stronger effect compared to the same month the previous year. In such circumstances, since 2012, banks have made the highest monthly net purchase of foreign currency in transactions with clients. Having in mind the high foreign exchange liquidity of the banks, the excess foreign currency was placed with the NBRM. Favorable movements on the foreign exchange market were registered in the first half of August, which made the NBRM continue purchasing foreign currencies from the banks. Since the beginning of the year, the NBRM has been mainly purchasing foreign currency on the foreign exchange market in the total amount of Euro 198.4 million from the market makers and, after a longer period of time, they have been considered the most significant factor for increasing the foreign reserves.
The solid denar liquidity in most of the banks lowered the trade in the money markets, where market interest rates remained at a relatively stable level in July. At the same time, after meeting the market demand, banks placed excess cash in the NBRM overnight deposit facilities, whose average monthly balance registered a moderate increase in line with the movement in the autonomous liquidity factors.
In July, the international financial markets registered prevalence of risk aversion and higher yields of government bonds on both sides of the Atlantic, which is associated with the favorable macroeconomic indicators in the United States and expectations for positive economic performance in the euro area. At the meeting, the ECB confirmed the intention to terminate bond purchases in December this year, but it was also argued that it is necessary to retain the adjustable monetary policy. At the Fed meeting, support was given for the gradual increase in the interest rate spread target. At the beginning of August, there was a change in the market movements and a global risk aversion, amid escalating trade tensions between the United States and China, as well as the rising trade barriers and deterioration of the political relations between the United States and Turkey. Consequently, investors are turning to safe instruments, which rose government bond prices and the value of the US dollar.
In summary, at the meeting, the Committee concluded that according to the current economic and financial conditions, the perceptions of the monetary policy environment are somewhat more favorable than before, which suggests that there is room for further monetary policy easing. This primarily refers to the foreign exchange market, where the movements have been continuously favorable, reflecting the improved foreign exchange position of the corporate sector, as well as the favorable movements on the currency exchange market. Yet, the conclusion remains that there are risks from both the domestic and the external environment, which can change the favorable trends. For this reason, the NBRM will continue to carefully monitor the trends in the period ahead.
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National Bank of the Republic of North Macedonia