On 10 January 2017, the NBRM's Operational Monetary Policy Committee held its regular meeting

On 10 January 2017, 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.

After declining in December 2016, the Committee decided to cut CB bill interest rate by additional 0.25 percentage points, to 3.5%, and to increase the supply of CB bills from Denar 23,000 million to Denar 25,000 million.

This response of monetary policy reflects the further stabilization of economic agents' expectations and the growth of the structural liquidity of the banking sector. Signs of stabilization remain evident in two points where the political crisis hit the most - foreign exchange market and deposits in the banking system. In December, the NBRM intervened by purchasing foreign currency for the sixth consecutive month, with a relatively large amount, whereby the interventions were aimed at net purchase for the entire year and have a positive contribution to the change in foreign reserves. Also, preliminary December data indicate further intensified growth of household savings in the banking system. These data also show pronounced household preferences to hold of domestic currency. Favorable developments are registered amid further positive estimates for stability of economic fundamentals.

Analyzing economic activity in the Macedonian economy, the number of available indicators for the fourth quarter of the year so far is limited, and their movement sends out different signals, so for now, it is difficult to make accurate assessments. The latest data on inflation for 2016 show that the average annual change in domestic consumer prices remained negative (-0.2%, on average), amid lower food and energy prices. On the other hand, core inflation registered positive annual growth rates. Inflation performance in December 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. Preliminary fiscal sector data for 2016 point to a lower budget deficit compared with the previous year, and thus maintenance of the process of fiscal consolidation for the second consecutive year.

The Committee concluded that in December the liquidity in the banking system recorded a relatively high monthly increase, mainly due to the National Bank interventions to purchase foreign currency from market makers (in the amount of Euro 63.45 million). The banks held excess foreign currency generated by favorable movements in transactions with customers, primarily with companies. Also, there was an increased supply by exchange offices, as seasonal effect before the Christmas and New Year holidays, while natural persons registered stable movements and net purchase of foreign currency. With these movements in December, the total performance of the foreign exchange market in the last quarter of the year is extremely favorable, whereby banks in transactions with customers realized net purchase of foreign currency for the second consecutive quarter. Performance of the foreign exchange market, as well as the adjustment of the high currency positions of banks in conditions of increased lending with currency component, enabled the National Bank to purchase a grand total of Euro 182.75 million in the second half of the year, which is more than the sales in the period of instability in the foreign exchange market in the second quarter. Thus, in 2016, the National Bank registered a net purchase of foreign currency in the amount of Euro 16.65 million on a cumulative basis, thereby increasing liquidity in the banking system. Despite the foreign currency interventions, government transactions influenced towards increasing banks' liquidity in 2016. Banks mainly direct the high Denar liquidity in deposit facility with the National Bank.

The data on foreign reserves in December show growth, primarily as a result of the NBRM interventions by purchasing foreign currency, indicating favorable balance of payments flows. Foreign reserves were higher throughout 2016, with the most pronounced effect on their growth of government transactions and foreign currency deposits of banks with the NBRM. 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.

Further stabilization of economic agents' expectations is also evident through changes in the banks' deposit base. Preliminary ten-day data for December 2016 show a monthly increase of 4% in total deposits, which is a significant acceleration compared to the recent pace of growth. Growth of total deposits in December largely stemmed from the higher corporate deposits, but the contribution of household savings is significant. In terms of currency structure of household savings, as opposed to the previous three months when the contribution of the Denar and the foreign currency component to the deposit growth was relatively balanced, in December 2016, almost 90% of the increase in household savings is in denars. In December, the annual growth of total deposit base of banks was 5.7%, which is an acceleration of the annual growth, which is also higher than projected. Credit market data as of December are also favorable and show acceleration of the monthly growth of total loans to the private sector, mainly driven by the corporate sector. Credit flows in the last quarter exceeded expectations, whereby the annual growth rate of loans of 6.6% is above forecast. 

In December, international financial markets were influenced by the divergent monetary policy setup of the ECB and the Fed, confirmed by the decisions taken at the meetings of these central banks in December. Euro area registered positive price developments at the end of the year, amid higher energy prices, which is related to the decisions to restrict the supply of oil by exporting countries of this fuel.

The Committee also agreed that recent data indicate steady 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 2016. The assessments for stable economic fundamentals remain positive. The risks arising from the domestic political developments have been mitigated, but still present. At the same time, the 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.