Skopje, 13 December 2022

The National Bank continues to tighten monetary policy: interest rates increased by additional 0.5 percentage points 

On 13 December 2022, the National Bank’s Operational Monetary Policy Committee held a regular meeting and discussed the latest data and information on the domestic and global economy and the latest developments on the international and domestic financial markets in the context of the monetary policy.

At its meeting, the Committee decided to increase the interest rate on CB bills by 0.50 percentage points to the level of 4.75%. The supply of CB bills at the regular auction remains unchanged and amounts to Denar 10 billion. In accordance with the increase in the key interest rate, the interest rates on overnight credit were also increased. At its meeting, the Committee decided to increase the interest rates on overnight and seven-day deposit facilities as well, by 0.50 percentage points. 

With these changes, the National Bank continues to tighten monetary policy, which started since the end of last year, for the purpose of maintaining the stability of the exchange rate and the medium-term price stability. In short, from the end of last year, the National Bank actively managed liquidity through the foreign exchange market interventions, and from April onwards also through increase in interest rates. Such monetary setup is supported and strengthened by the several changes in the reserve requirement, aimed at increasing savings in denars, as well as by systemic measures, such as the introduction of a countercyclical capital buffer (of 0.5%), which further strengthens the resilience of the banking system.

Changes in the monetary policy setup are still a response to inflation, while the foreign exchange market is stable. In November, for the first time this year, the trend of accelerating annual inflation was terminated, influenced by the slower growth of the food component, and in line with the changes in prices on international markets. However, the risks from stronger transmission effects on core inflation of the energy and food prices, which still exist, as well as the raising of inflation expectations impose a need for a further monetary response. Given the connection of our currency to the euro, the decision-making is also influenced by the changes in the monetary policy of the European Central Bank, which is expected to continue to increase interest rates in the period ahead.

Regarding the latest indicators, the annual inflation rate in November slowed down to 19.5%, whereby the average annual inflation in the period January - November 2022 amounts to 13.8%. About 76% of this growth is still a direct effect of the growth of the prices of food products and energy. Uncertainty arising from the future dynamics of the prices of primary products in markets, and especially of energy, is pronounced due to the military developments in Ukraine and the sanctions against Russia, due to which the conduct of prudent domestic policies and the careful management of domestic demand are extremely important.

The domestic foreign exchange market is stable, amid a greater demand for foreign currency of the corporate sector, which is largely offset by the favorable movements on the currency exchange market and the solid currency position of banks. The National Bank hardly intervenes on the foreign exchange market, and from July onwards foreign reserves have been continuously increasing and are above the estimates from the latest forecasts. The level of foreign reserves meets the international standards necessary for the maintenance of the stability of the exchange

rate of the domestic currency. Regarding the latest available data from the external sector, the trade deficit in October 2022 is currently within the expectations for the fourth quarter, according to the October forecast, but the assessment period is too short to draw more precise conclusions. As of the end of November 2022, data on currency exchange operations point to the possibility for net inflows of private transfers that are slightly higher than expected.

 As for the domestic economic activity, in the third quarter of the year, the adverse effects of the energy crisis and the growth of the costs on certain sectors of the economy have come to the fore, which resulted in a slower economic growth (2%). Performances in the third quarter of 2022, as well as those for the first three quarters of the year (growth of 2.7%), are slightly better than forecasted. Available high frequency data for the domestic economic activity in the fourth quarter are insufficient, but they currently underpin the expectations that the growth will slow down by the end of the year. Thus, October data show a small real annual decline in total trade turnover, despite the small growth in the previous quarter, and further adverse movements in industrial output.

Regarding the monetary developments, according to the initial data as of November, the lending activity continues to grow, but at a more moderate pace and in line with the expectations, while the deposit growth accelerates at a stronger pace than expected.

In November, the international financial markets registered reduced volatility, and the market expectations point to further tightening of the monetary policy by the global central banks. In the USA, due to the investors’ perceptions that the price pressures in the USA are reduced, the expectations for a more moderate increase in the policy rate by the Fed, increased. Market expectations in terms of the ECB interest rate are also aimed at its further increase, in response to the inflationary pressures in the euro area, and amid high uncertainty arising from the future dynamics of the global prices of primary products.

Overall, the unfavorable external environment and the pronounced risks require conducting extremely prudent domestic policies. The National Bank closely monitors macroeconomic data and risks. As before, the central bank is prepared to use all the necessary instruments and to take measures that will contribute to maintenance of the stability of the exchange rate, stabilization of inflation expectations and to medium-term price stability.