Limited Policy Options To Address Inflation

BMI View: The close tracking of eurozone interest rates and the exchange rate mean that the National Bank of the Republic of Macedonia has limited policy options to address rising consumer price inflation. That said, we currently do not expect the recent rise in inflation to persist beyond the near term.

Economic growth and a currency peg to the euro dominate monetary policy considerations in Macedonia. Despite not having raise d interest rates for over three years, monetary conditions in the country continue to tighten, based on a contraction in the broad money supply at a time of weak economic growth. Macedonia's economy did not post any full-year growth in 2012 and we forecast the US$9.61bn economy to grow by 1.5% this year. The interest rate trajectory in Macedonia is closely linked to the main refinancing rate fixed by the European Central Bank (ECB) in Frankfurt, and in turn, considering the tracking of the euro, means that money supply growth will be adjusted based on existing exchange rate pressures.

Less favourable trade dynamics and broad capital outflows from emerging markets in recent months may have played a role in restricting broad money supply in Macedonia in May, in which case the declining refinancing rate, which was lowered by 25 basis points (bps) to 3.50% on July 1, seems suitable. That said, we note that an increase in food prices has seen consumer price inflation rise to 4.2% year-on-year (y-o-y) in June, up from 3.4% y-o-y in May. Although this will likely be a temporary spike in consumer prices - we forecast end-year inflation at 3.4% - a continued rise in the consumer price index may be an increasing cause for concern for the National Bank of the Republic of Macedonia (NBRM).

Limited Concerns Over Price Stability
Macedonia - Policy Rate, Inflation & Money Supply

BMI View: The close tracking of eurozone interest rates and the exchange rate mean that the National Bank of the Republic of Macedonia has limited policy options to address rising consumer price inflation. That said, we currently do not expect the recent rise in inflation to persist beyond the near term.

Economic growth and a currency peg to the euro dominate monetary policy considerations in Macedonia. Despite not having raise d interest rates for over three years, monetary conditions in the country continue to tighten, based on a contraction in the broad money supply at a time of weak economic growth. Macedonia's economy did not post any full-year growth in 2012 and we forecast the US$9.61bn economy to grow by 1.5% this year. The interest rate trajectory in Macedonia is closely linked to the main refinancing rate fixed by the European Central Bank (ECB) in Frankfurt, and in turn, considering the tracking of the euro, means that money supply growth will be adjusted based on existing exchange rate pressures.

Limited Concerns Over Price Stability
Macedonia - Policy Rate, Inflation & Money Supply

Less favourable trade dynamics and broad capital outflows from emerging markets in recent months may have played a role in restricting broad money supply in Macedonia in May, in which case the declining refinancing rate, which was lowered by 25 basis points (bps) to 3.50% on July 1, seems suitable. That said, we note that an increase in food prices has seen consumer price inflation rise to 4.2% year-on-year (y-o-y) in June, up from 3.4% y-o-y in May. Although this will likely be a temporary spike in consumer prices - we forecast end-year inflation at 3.4% - a continued rise in the consumer price index may be an increasing cause for concern for the National Bank of the Republic of Macedonia (NBRM).

Catching Up With Draghi
Central Bank Policy Rates

Although transmission mechanisms of monetary policy in Macedonia are unlikely to be very effective against temporary supply-driven price pressures, we note that with easy policy in Europe set to remain in place for several years in light of the low-growth environment, a return to more robust economic growth in Macedonia over the coming years could be a growing cause for concern. Having said that, we remain sanguine in our outlook, given that the close tracking of the euro should he lp to offset imported inflation, relative to other emerging markets with relatively weaker exchange rates.

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This article is tagged to:
Sector: Country Risk
Geography: Macedonia, Macedonia, Macedonia, Macedonia, Macedonia, Macedonia
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