(достапно на англиски јазик)

Honorable President Siljanovska Davkova, dear governors and speakers, Mr. Uzan, your excellences, representatives of the academia and media, ladies and gentlemen,

It is my great pleasure and honor to welcome you and address you at the High-level Conference co-organized with the Reinventing Bretton Woods Committee.

It seems that the conference comes at a right moment to reflect on how well has the central banking community coped with the past crisis and look-up into the future, which may be equally challenging. And somehow, I thought that an appropriate wrap up on how central banks have dealt with the major setbacks is by quoting Eleanor Roosevelt - “We do not have to become heroes overnight. Just a step at a time, meeting each thing that comes up, seeing it is not as dreadful as it appeared, discovering we have the strength to stare it down."

And indeed, through strong commitment and consistency, central banks have proved that they have the capacity and knowledge to deliver their mandates, despite the difficult hardships. The pandemic, geopolitical turmoil and the subsequent steep rise in commodities prices fueled inflation across the globe. “Central banks faced an enemy they thought they had long ago defeated for good” (BIS Annual Report, 2024). Obviously, this was not the case. After five decades, the same enemy, i.e., the great inflation, returned. This time, however, given the lessons learned  from 70’s, central banks were better equipped and their response was significantly swifter, bolder and more comprehensive, including diverse set of instruments, which played an important complementary role to the main policy instrument (interest rates). This was in particular the case in emerging economies, including our region.

This extremely complex context was not only a test of central banks’ analytical capacity, but also a test of their resilience to withstand potential interference and threats to their independence. High inflation was eroding the household purchasing power. Rising interest rates was unpopular, yet necessary measure. It was an additional burden for those with high leverage, both private and public entities. And in many cases, leverage was at historically high level following a decade of ultra-easy financial conditions.

This implied that central banks were not able to enjoy anymore the so-called "capital of inattention", as they were now in the spotlight of public policy discussions. For illustration purposes, while before inflation spike, 55% of the EA citizens were not interested in the ECB and its policies, afterwards, over 60% started paying more attention than in the past.[1] The interest in central banks gained even more ground, as in the last decade they have been entrusted with many new tasks, some of them having distributional effects, which in principle increases the risk of pressures from different lobby groups. Thus, many stakeholders started bringing to focus the suitability of central banks’ policy and rationale for their independence.

Central bank independence became a globally accepted truth of economics about 30 years ago. History taught us that whenever central banks tried to directly or indirectly accommodate other needs (be it stimulating economy or debt financing), the result was high and lasting inflation. Research points that only independent central bank can maintain its credibility and keep inflationary expectations anchored and thus prevent opening up of wage-price spiral. It is thus important to avoid even the appearance that fiscal considerations might be dominating monetary policy.

According to the latest Central Banking survey[2], 87% of central banks believe that their governing laws sufficiently protect their independence. In our case independence provisions are enshrined in the Constitution and the Law on the central bank, which are assessed (by the EU) to have a high level of alignment with EU acquis. An adequate legal framework for sure is necessary, but not sufficient. In practice, the context might be more complex, underlining the importance of resilience and integrity of central bank’s management.

Still, independence cannot be a free lunch. It has to go hand in hand with central banks accountability and transparency, which in fact have increased over time. As Blinder says " Whereas in the past central banks believed in secrecy and even mystery, greater openness is now considered a virtue". And greater openness is the key for convincing public that central bank acts in the public best interest. Especially at times of huge uncertainty, forecasting errors, deviation from targets, speculations on exchange rate and banks. Our central bank, faced with all these challenges, including speculations that contributed to the loss of 15% of official reserves in two episodes, has significantly stepped up the communication, guided also  by the IMF Code of Transparency assessment conducted in 2020.

Recent shocks have once again reconfirmed that independent and credible central banks are the backbone of proper navigation through economic turbulences, with already visible outcomes. Disinflation policies, alongside the dissipating stress on commodities markets calmed inflation to low single digits. In the SEE region, latest inflation readings point to inflation of around 3%, strong adjustment compared to 14.3% at its peak in late 2022.  In our case, inflation has come down to 2.2%. Inflation expectations have also stabilized. Looking at different market and survey based indicators, we can broadly infer that the anchor has survived the inflation spike and it is brought down close to the pre-crisis levels.  

While inflation was at the core of central banks’ actions, it was also important to calibrate policy response without dragging economies into recession, i.e., having as smaller as possible sacrifice ratio. While in 70-80’s it took two recessions to stabilize inflation, this time is different. Although monetary policy operates with lags and it might be too early to draw conclusions, data point that “hard lending” in the SEE region has been avoided. Indeed, growth rates decelerated in 2023 to an average of 2.7%, but all countries avoided contraction.

Last but not least, price stability has been achieved without costs for financial stability. On the contrary, financial soundness indicators point to strengthened solvency and quality of the banks’ balance sheet in the region, including in the Macedonian economy where capital adequacy has been the highest in the last two decades. This, to a great extent, reflects the active use of macroprudential measures confirming that they notably increase room for maneuver of monetary policy in its fight with inflation. 

To summarize through the lenses of the IMF MD Georgieva (2024) – “Just consider what independent central banks have achieved in recent years… while the battle isn’t yet over, their success thus far has largely been because of the independence and credibility that many central banks have built up in recent decades”.

All in all, we have managed to ride out a major storm, but a storm that transformed global landscape and scarred economies. Hence, “going forward, monetary policy may well face an environment no less challenging than the one that has prevailed in the past decades” (BIS, 2024).  In this vein, there are several issues that I would like to bring into the spotlight.

First, it is the inflation dynamics. Though the inflation is brought to low single digits, the sectoral dynamics of prices shows stronger persistence in services inflation, with core inflation hovering around 5%, being only 48% below its peak (headline inflation is lower by 79%). This no doubt underlines the importance of appropriate wage policies, in particular when SEE region observes a nominal and real wage growth hovering around 15% and 10%, respectively.

The second issue that deserves attention is the monetary–fiscal nexus. The recent shocks underscored that monetary policy is powerful, but it has limitations. Therefore, not derailing from the fiscal consolidation commitment will be critical in the forthcoming period, both to ensure fiscal sustainability and to support the monetary policy.

The third point relates to structural factors and their impact on the supply in the economies and their potential to grow. The reversal of globalization (risk not faced since the First World War), population aging and climate forces could all lower the productive capacities, making supply less elastic to demand and thus creating “more inflation prone world”.  Only for the risk of geo-economic fragmentation, estimates point to loss in world GDP in between 0.2% - 12%. On the other hand, the rapid advance in technology, such as the entrance of artificial intelligence, could smooth the impact of the above-mentioned adverse forces and elevate the growth potential. These transformations require well defined reforms to increase the resilience of economies and thus reduce medium-term inflationary pressures.  

All this just reconfirms that the uncertainty and unpredictability are here to stay and that global transformation of the economies might take different directions. In such a context, central banks must remain watchful, flexible and with robust frameworks. It is a fact that central banks have so far risen to the extraordinary challenges, which in a certain way proves that longstanding investments in the capacity, independence and accountability pay off. Yet, we must be humble as well, acknowledging the uncertainty and complexity of new reality.

At the end, let me close with something said by Winston Churchill back in the past, but equally relevant for policymakers today “This is not time for ease and comfort. It is the time to dare and endure”.

Thank you