The National Bank of the Republic of Macedonia Council held its regular session

Today, the National Bank of the Republic of Macedonia Council held its regular session at which the latest Quarterly Report and the Macroeconomic Projections until 2021 were discussed and adopted. During the third quarter of this year, the key interest rate was reduced from 3% to 2.75%, reflecting the sound economic bases and the absence of imbalances, evident through the continuous favorable movements on the foreign exchange market, the solid external position and the stable expectations of the economic agents.

Regarding the latest macroeconomic projections, the Report indicates certain changes compared to the April forecast. Namely, the growth expectations for 2018 have been revised downwards, from a growth of 3.2% as expected in April, to 2.3%. These changes mainly arise from the performance in the first half of 2018, when the economy registered lower growth than expected, primarily as a reflection of the drop in investments. On the other hand, also within this projection cycle, assessments for a growth of 3.5% in 2019 have been retained, with its further acceleration to 3.8% and 4% in 2020 and 2021, respectively.

For this forecast period, the growth assumptions remain the same, mainly derived from exports and investments, despite the somewhat less favorable external environment, which is mainly due to the slightly lower growth of foreign demand and the increased risks to the world economy, compared to previous perceptions.

The main factors for growth are the activities of new export-oriented industrial facilities, foreign investments, as well as public investments in road infrastructure. Analyzing the growth structure, domestic demand is expected to remain the major generator of growth in the projection period, with the exception of 2018, when net exports will have a significant positive contribution.

Regarding the future price trajectory in the domestic economy, the latest forecasts point to maintenance of the environment of stable prices and absence of significant inflationary pressures. The inflation forecast for 2018 was corrected downwards, i.e. the inflation rate was revised to 1.6% (as opposed to 2% in the April projections), mainly due to the current lower performances. It is expected that the inflation rate in 2019 will equal 2%, as in the previous projection cycle, while the growth dynamics of domestic prices of around 2% are expected to endure until 2021.

Within this projection cycle, the Quarterly Report points to maintenance of previous assessments for a favorable and stable external position, with a low current account deficit and long-term sources of financing sufficient to cover the deficit and for additional accumulation of foreign reserves. The estimated current account deficit for 2018 is 0.5% of GDP (downward revision relative to 1.5% of GDP in the previous projection), while on a medium run, it is expected to average 1.6% of GDP. The foreign reserves adequacy indicators show that they will remain in the safe zone during the entire projection period.

The credit activity of the banking sector is further assessed as an important factor that supports economic growth. For 2018, according to the performance at the beginning of the year, upward correction with the loans to the private sector was made, with the credit growth being projected to 8.4%, compared to 6.5% with the April projections. For 2019, a similar dynamics of lending activity growth of 8.5% is expected (7.7% in the April projection), while for the future period as of 2021, the credit growth is expected to be 8.4%, on average. The estimates for acceleration of the credit growth rely on the assumptions for stable expectations, growth of the banks’ deposit potential and intensified economic activity.

Risks to achieve the basic macroeconomic scenario in the external environment are assessed as somewhat less favorable compared to the April projection cycle. In addition, external risks associated with the global economic environment are assessed as unfavorable both in the short and the medium term, in conditions of increased global uncertainty. At the same time, the uncertainty of the domestic political context is still present. On the other hand, as in the April projections, in the current projections, as well, no implications of possible entry into NATO and the start of accession negotiations with the EU are incorporated.

Generally, the latest macroeconomic forecasts point to safe and sound fundamentals of the domestic economy, with potential for solid growth supported by the banks’ lending activity, amid absence of inflationary pressures and maintenance of favorable external position. This scenario assumes a stable and predictable domestic political environment and a continuation of the policy of supporting the overall investment activity in the economy, further inflow of foreign investments, strengthening of the public infrastructure cycle, and the relatively favorable external environment. The possible failure of the embedded assumptions or materialization of the emphasized unfavorable risks can lead to deviations from the forecast path of key indicators.

In the period ahead, the NBRM will closely monitor the trends and changes in the domestic and external environment, for the purpose of timely and adequate adjustment of the monetary policy.

The Council has also discussed other matters within its jurisdiction.