Today, the National Bank Operational Monetary Policy Committee has held an extraordinary electronic meeting, making a decision to cut the policy rate by 0.25 percentage points to 1.75%. This is the second cut this year since January when, given the high foreign reserves and low inflation movements, amid global risks including the spread of COVID-19, we loosened monetary policy. The need for extraordinary meeting stemmed from the rapid spread of COVID-19 globally, thereby deepening the risks in the domestic economy. The Committee has reviewed the latest economic indicators, discussing the effects of COVID-19 outbreak on the global and the Macedonian economy. Hence, the following conclusions were drawn:
Risks to the global and domestic economies caused by the outbreak of COVID-19 have been pronounced. Initial expectations that the outbreak would be localized in mainland China proved unrealistic, and the risk that its duration, severity, and geographic distribution would be high has materialized shortly after. From late February to early March, the virus spread to over 80 countries around the globe. Measures taken globally to prevent its spread include restricting movement, delaying many activities, aggravating global production chains, changing market prices of financial instruments and primary commodities. All of these measures have affected the supply and demand in the economy, as well as consumer and investor confidence and accordingly, the overall economic growth.
The magnitude of total adverse economic effects can hardly be determined due to the uncertainty about the duration and severity of the virus infection. While the current shock is noneconomic in nature and unlikely to jeopardize the long-term growth potential and macroeconomic fundamentals of economies on a permanent basis, its short-term effects on the global economy will most likely be pronounced, cause a major slowdown or decline the global economy. The European Central Bank has announced its March forecasts for the euro area as our major trading partner. These forecasts do not fully capture the latest effects of COVID-19 on the global activity and trade and predict a euro area growth of 0.8% in 2020. However, their scenarios of COVID-19 effects on the euro area that assume the pandemic to last by the end of the first half of this year, suggest by 0.6 - 1.4 percentage points slower activity than this scenario. Moreover, the ECB emphasizes that these scenarios do not imply a monetary or fiscal response, which, if undertaken, would significantly mitigate any adverse effects.
The risk materialization and its adverse effects on the economic growth have led to a rapid response of many central banks by cutting their policy rates and/or taking additional measures to create liquidity and support lending. Such measures were taken by the Federal Reserve System, the European Central Bank and Bank of England aimed to further ease the financing terms and support the real sector, amid unexpected adverse shocks with strong impact on the overall activity.
Amid stable inflation and adequate foreign reserves, but adverse external effects and measures to limit the risks of spreading COVID-19, the National Bank decided to cut the policy rate by 0.25 percentage points, to 1.75%. This is the second rate cut in 2020 aimed to lower the cost of financing through bank loans, which tends to maintain the lending cycle and mitigate the adverse shock effects on the domestic economy, especially the corporate liquidity, although the banks’ liquidity potential is high.
The National Bank has considered additional measures to support the economy when hit by noneconomic and unexpected adverse shocks. These measures include changes to stimulate banks to support the most affected economic sectors, through targeted changes to some monetary instruments and through changes to the regulatory requirements.
We reiterate that for the time being the flows are stable, and the National Bank remains committed to successful implementation of its objectives: maintaining stable prices, stable exchange rate and financial stability. The level of foreign reserves is comfortable and fully adequate to respond appropriately to any risk materialization and need to absorb effects. The banking system of our country is resilient to shocks, including the effects of the spread of COVID-19 globally. The domestic banking system is sound, solvent and liquid and in better shape than at the beginning of the global financial crisis in 2008.
The National Bank will continue to monitor closely the developments and any surrounding risk, as well as their effects on the domestic economy with a view to making appropriate policy adjustments and timely response.
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