Monetary policy has taken a number of standard and non-standard measures which have resulted in historically low interest rates. Hence the assessment for the limited room for further adjustment measures. Given the expected low inflationary pressures, the monetary policy stance, in general, will depend on the developments in the external sector. Hence, the main point that needs to be highlighted, and which is aimed at supporting long-term growth, are the structural reforms. In the recent period, Macedonia has been making great efforts to improve the business climate, which is being confirmed by the business indicators (Doing Business). In this regard, Macedonia is ranked 30th place for 2015, which is an improvement of six positions relative to 2013. Improved ranking is observed in all categories, with the exception of the segments “obtaining credit” and “procedures for obtaining building permits”. However, there are segments where there is room for further improvement – procedure for obtaining building permits, access to electricity, registration of property, implementation of contracts. The latest Transition Report of the EBRD also refers to the areas where greater efforts are required. In fact, there are few segments where there is complete convergence to the setup in the developed market economies. The energy sector, infrastructure and financial sector (particularly in the part of providing additional funding through the capital market) are highlighted areas where further reforms are needed. The last aspect, i.e. the deepening of the capital market is a very important element in the growth pattern.

In these situations of moderate and fundamental-driven capital flows, the prevention of financial vulnerabilities resulting from exchange rate volatility should be addressed through financial regulation and financial development. In fact, this has been the case of Chile, where the regulation of currency mismatches has prevented banks from excessive risk taking, and the deepening of the financial system has provided an increasing hedging capacity of the private sector. Nonetheless, this approach is not free of situations like those experienced in some emerging market economies like Mexico, Brazil and South Korea after the Lehmann bankruptcy, where the un-regulated corporate sector became systemically important after the misuse of hedge instruments increased dramatically their exposure to exchange-rate risk. In this regard, strict rules for addressing excessive risktaking from financial intermediaries that fund these positions should be implemented. On the other hand, when a country is subject to a sudden surge of capital inflows due to the incentives associated with temporary macroeconomic and financial conditions, or due to sudden changes in the international investors’ portfolio decisions, the inflation-targeting framework may be subject to important challenges. These challenges are particularly important when episodes of capital flows also result in inflationary pressures. Under these circumstances, dealing with inflationary risk through interest-rate policy may generate further incentives for capitals inflows, exacerbating exchange rate volatility and even creating an over-appreciated currency. From the point of view of macroeconomic policies, this requires to ensure that fiscal policy is not what is inducing capital inflows.