dimitar bogov : modern payment systems ’ impact on monetary policy and financial stability welcome speech by mr dimitar bogov, governor of the national bank of the republic of macedonia, at the 16th international conference of clearing institutions in central and eastern europe ( icci ), skopje, 12 october 2011. * * * mr. chairman, dear participants and guests, it is an honour and pleasure to give a welcome speech to such a distinguished audience. i thank klirinski interbankarski sistemi skopje ( kibs ) for this opportunity. my topic will be the link of payment systems with the two main central - bank tasks of monetary policy and financial stability. while money needs to circulate freely through the economy, without imposing excessive burdens, other economic agents also need to be confident that commercial banks will honour their sight liabilities by converting them into banknotes, i. e. central - bank money, at their demand. the central bank allows commercial banks to transfer among them funds held in accounts with the central bank. the development of a payment system is thus part of the development of a central bank and out of this operational capacity grew the cooperation with the commercial banking system when setting - up the facilities it operates and overseeing the facilities other participants operate. this pivotal role of the central bank, unmatched by any other participant, does make us humbly aware of the strong link between payment systems and monetary policy on one hand, and payment systems and financial stability on the other. let me devote the central part of this welcome speech to these different, yet interrelated links. monetary policy impulses are transmitted from those financial institutions that have a direct relationship with the central bank to other institutions and households. the central bank typically conducts its monetary policy only with designated financial institutions, mostly commercial banks rather than with other economic agents. as a result other economic agents rely on the designated financial institutions that have a direct relationship with the central bank. the functioning of the transmission relies on the smooth functioning of payment infrastructures enabling transactions of these institutions with the central bank, as well as amongst themselves at the interbank market. if the operation of payment systems is underdeveloped, these designated financial institutions choose to keep a relatively large buffer of central - bank money to help them manage their liquidity, which in turn leads to weaker than intended monetary - policy impulses from the central bank. but in general, after the payment systems in the economy have reached a certain threshold,

do you expect it to be next year? the estimate for this year is about 7 percent, and for the next year it is somewhat higher. in which direction will the interest rates on loans and deposits move next year? the downward trend is likely to continue, although at a slower pace. the european central bank reduced the basic interest rate to 0. 75 percent in order to stimulate the economic growth. the national bank of the republic of macedonia maintains it at 3. 75 percent. why not reducing it down to 1 percent in our country, too, which will reduce the interest rates on loans as well? in a highly euroized economy as the macedonian, it is necessary to motivate economic agents to demand denars, not euros. therefore, interest rate parity on denars and euros must be kept at an appropriate level that stimulates the demand for denars. in the last three years we have reduced that parity from 8 percent to only 3 percent. further reduction is a process that depends on the resilience of the economy. macedonia will have to save more what are your expectations for the macedonian economy in 2013, which is expected to be perhaps more difficult and more turbulent than this year? what, according to you, will be the biggest economic challenges and problems next year? it will be another year full of uncertainty for the world and especially for the european economy. thus, the export demand for macedonian products is unlikely to improve. so, we cannot expect that to boost economic growth. however, our expectation for the economic growth in macedonia is to be much better than this year, driven by diversification of the production into new export - oriented facilities that started to work this year, or will start to work in the next year, as well as infrastructural facilities for which funding has already been secured from foreign sources. both politicians and economists globally are of a divided opinion in terms of the economic policy that should be conducted in order to emerge from the crisis. some advocate austerity, others encourage spending to stimulate growth. which policy you prefer and think is right for macedonia? according to me, those are “ false ” discussions. if a country has a room for increased spending, certainly now is the time to stimulate the economy. but unfortunately, there are not many such countries worldwide. developed economies were spending more than they could afford for years, and now they do not have any room for fiscal stimulus left. it is easy to say that now you have to