1. Monetary policy design

The National Bank of the Republic of Macedonia (NBRM) is a central bank, independent in the performance of its functions, whose primary objective is to maintain price stability. NBRM supports the economic policy and the financial stability of the country, without jeopardizing the accomplishment of its primary objective, by observing the market economy principles. NBRM, in line with its legally set functions, designs and conducts the monetary policy. At the end of the current year, NBRM, within the previously defined macroeconomic policy framework, prepares a Monetary Developments Projection for the following year, which is subsequently adopted by the NBRM Council.

2. Monetary policy objectives

Maintenance of price stability is the primary objective of the National Bank of the Republic of Macedonia specified by law. Establishment of this objective is in line with the empirically confirmed findings that price stability creates the most favorable macroeconomic environment for economic development sustainable in a long run. Until end 1999, inflation in the Republic of Macedonia was measured through the retail price index, and since 2000 it has been measured through the consumer price index. For achieving its ultimate objective, NBRM establishes an intermediary objective of the monetary policy. Thus, from April 1992 through September 1995, NBRM applied the strategy of targeting the money supply M1, as an intermediary objective of the monetary policy. In October 1995, NBRM started implementing the monetary strategy of targeting the nominal exchange rate of the Denar against the Deutsche Mark, and since January 2002 - against the Euro. Accordingly, intermediary objective of the monetary policy is the maintenance of the Denar exchange rate stability. The implementation of the exchange rate targeting strategy results from a/ the significance of the exchange rate in a small and open economy; b/ the need of nominal anchor for maintenance of credibility; c/ the high level of euroization, and d/ the transparency of the exchange rate policy and possibility to be daily followed by the economic agents.

3. Interest rate policy and transmission mechanism

When the monetary policy is focused on maintaining Denar exchange rate stability, the interest rates and money supply are dependent categories, determined by the achievement of the intermediary objective. NBRM, through its interest rate policy, sends monetary signals to banks, and thus, tends to influence their lending and deposit interest rates. Currently, the interest rate achieved at the CB bills auctions is regarded as key interest rate of the NBRM.