On 13 December 2016, the NBRM's Operational Monetary Policy Committee held its regular meeting and discussed the situation in the domestic economy

On 13 December 2016, 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 the light of the monetary policy setup.

The Committee decided to cut CB bill interest rate by 0.25 percentage points, to 3.75%, and to increase the supply of CB bills at the 14 December auction from Denar 22,000 million to Denar 23,000 million. This response of monetary policy reflects the apparent stabilization of economic agents' expectations in the last six months, and the significantly higher structural liquidity of the banking sector. There are signs of stabilization in two points where the political crisis hit the most - foreign exchange market and deposits in the banking system. Amid favorable developments in the foreign exchange market, in December, the NBRM purchased foreign currency for the sixth month in a row. At the same time, preliminary November data show ongoing growth of household savings in the banking system since June. Favorable developments take place amid positive estimates for stability of economic fundamentals.

Perceptions of favorable developments in the US economy, especially labor market, and positive outlook for the period ahead prevail in the international financial markets. Euro area continues implementing expansionary monetary policy, mainly through the extension of the ECB's quantitative easing program at least by the end of next year.

In such setting, in the third quarter, the Macedonian economy continued to grow, at a solid growth rate of 2.4%, which is also slightly higher than forecast. The growth of economic activity is driven by consumer spending and exports. The number of available high frequency indicators for the fourth quarter is limited, and their movement sends out different signals, so for now, it is difficult to make accurate assessments. Analyzing inflation, in the period January-November 2016, the average annual change in domestic consumer prices remained negative (-0.2%, on average), amid lower food and energy import prices. On the other hand, core inflation registered positive annual growth rates. Inflation performance in November points to somewhat lower than projected inflation, and the expectations for import prices were revised in a different direction, which is why the risks to the inflation forecast for the next period are assessed as balanced.

The latest data on foreign reserves in November show a decrease as a result of the regular settlement of government external liabilities and the maturity of foreign currency deposits of domestic commercial banks with the NBRM[1] since May 2016. On the other hand, the NBRM interventions acted towards accumulation of foreign reserves, indicating favorable balance of payments flows. All foreign reserves adequacy indicators show that they remain in a safe zone. Analyzing external sector indicators, available data for the fourth quarter show somewhat lower than expected trade deficit, while the net purchase on the currency exchange market, as a private transfer indicator, moves within expectations.

The latest data from December show that banks have held excess foreign exchange liquidity for six consecutive months, allowing the NBRM to purchase foreign currency in the amount of Euro 135 million. This fully replenished the part of foreign reserves used to stabilize the exchange rate at the time of the shock in April-May. The high NBRM purchase of foreign currency in this period is due to favorable movements on the foreign exchange market of banks in transactions with customers. Thus on this market segment, the total supply of foreign currency exceeded the total demand for foreign currency, amid annual growth of supply of foreign currency by companies and annual reduction of demand by companies. Also, the other customers segment reports an annual growth of purchase of foreign currency from exchange offices, non-residents and natural persons. The NBRM purchase of foreign currency significantly improved denar liquidity of banks that allocated excess funds to short-term deposit facilities with the National Bank, thus steeply increasing their balance. 

Further stabilization of economic agents' expectations is also evident through changes in the banks' deposit base. Preliminary November data show further solid growth in total deposits. Both the household and corporate sector contributed to the positive deposit performance. In November, the annual growth of total deposit base of banks was 4.4% and points to trends that are within expectations. Credit market data as of November are also favorable and show a monthly growth of total loans to the private sector, after their decline in the previous month. Analyzed by sector, the growth stems from increased lending to households, amid a slight decline in lending to the corporate sector. Credit flows in the period from October to November are weaker than forecast for the last quarter, but given the stabilization of the situation and the growth of the deposit base, a faster pace of credit growth is possible for the next period.

The Committee also agreed that recent data indicate further stabilization of economic agents' expectations, which tends to increase the household savings and the NBRM purchase of foreign currency on the foreign exchange market. These favorable developments indicate conditions for gradual adjustment of the policy rate to the levels achieved before May. The assessments for stable economic fundamentals remain positive. Risks arising from the domestic political developments have been mitigated, but still present. At the same time, risks arising from the global environment remain in the focus. The NBRM will closely monitor the developments in the coming period, while the future changes to the monetary policy will largely depend on the further stabilization of the domestic political environment.

Governor's Office