Skopje, 3 August 2023  

Changes in the reserve requirement to further support denarization and increase interest rates by 0.15 percentage points

On 1 August 2023, the National Bank Council held its regular meeting and adopted amendments to the Decision on reserve requirement. The National Bank’s Operational Monetary Policy Committee also held a 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 setup.

At its meeting, the Operational Monetary Policy Committee decided to increase the interest rate on CB bills by 0.15 percentage points to the level of 6.15%. At its meeting, the Committee also decided to increase the deposit facility interest rates, by 0.15 percentage points, whereby the interest rates on overnight and 7-day deposit facilities will equal 4.05% and 4.10%, respectively. The supply of CB bills at the regular auction remains unchanged and amounts to Denar 10 billion. The decision to change the interest rates is made in conditions of gradual stabilization, but the risks are still present, due to which the Committee assessed that there is a need for further precaution in the monetary policy conduct. Given the applied monetary strategy, when making monetary decisions one takes into account also the setup of the policy of the European Central Bank (ECB), which at the last meeting made a decision to further increase the interest rates.

The monetary tightening started from the end of 2021, first through the interventions on the foreign exchange market, and then, since April last year, with the increase of CB bill interest rate, as well as interest rates on other monetary instruments. These changes are also supported by the amendments to the reserve requirement, which were aimed at increasing denarization which registered positive trends. In order to strengthen the current positive effects of these measures, in August the National Bank Counciladopted additional amendments to the reserve requirement. In order to further support the process of denarization of the banks' balance sheets, the National Bank Council adopted a decision to increase the reserve requirement rate of foreign currency liabilities from 19% to 20%, the reserve requirement rate of denar liabilities with FX clause from 50% to 100%, as well as the percentage of maintenance of the reserve requirement from foreign currency liabilities which is met in euros, from 77% to 80%.

The monetary setup is also supported by the adopted macro-prudential measures, i.e. the increase in the countercyclical capital buffer, as well as the measures related to setting thresholds for monitoring of the quality of credit demand. These measures strengthen the systemic resilience of the banking system, as well as the transmission of the monetary signals. 

Regarding the individual indicators relevant to the monetary decisions, domestic inflation continued to slow down and in June 2023 it reduced to a one-digit level of 9.3% (11.3% in the previous month), amid a more moderate slowdown in core inflation. The latest changes in prices are in line with the National Bank estimates for a slowdown in the inflation rate within the April forecasting round. The slowdown in the annual inflation rate is conditioned by the slower growth of the prices in all three components, with the largest contribution to such dynamics being made by the food and energy component. However, inflation is still above the historical level, while core inflation suggests that the transmission effects of the energy and food prices have not yet been fully exhausted. Also, although there is a trend of a downward adjustment of the prices of primary products which reduces domestic inflationary pressures, the uncertainty arising from the future dynamics of the prices of primary products on the markets due to the war in Ukraine still exists, which imposes a need for precaution.

In accordance with the international standards, the level of foreign reserves at the end of June is appropriate for maintaining the stability of the exchange rate of the domestic currency. The developments on the domestic foreign exchange market during the second quarter were favorable, whereby the National Bank intervened by purchasing foreign currency on the foreign exchange market, and these trends were strengthened during July. Regarding the latest available data from the external sector, the trade deficit in the period April - May 2023 is lower than expected for the second quarter of the year, according to the April forecast. Currency exchange operations data for the second quarter of 2023 point to net inflows from private transfers that are higher than expected for the second quarter according to the April forecast.

As for the domestic economic activity, in the first quarter the growth of the economic activity was moderately higher than the National Bank forecasts, and the high-frequency data for the period April - May 2023 mainly point to a further growth of the economic activity in the second quarter of the year, but at a more moderate pace. Thus, industrial output increased in this period, but total trade turnover and construction registered a real annual fall, after their growth in the previous quarter. 

In the monetary sector, the latest data as of June 2023 still point to a rapid growth in deposits, which exceeded the expectations, with favorable movements in the currency and maturity structure, specifically higher savings in domestic currency and in the long term. Lending activity gradually slowed down, but continued to register solid annual growth, which is mainly in line with the April forecast for the second quarter of the year.

In general, inflation, combined with the uncertainty arising from the external environment, which still exists, imposes further precaution from the macroeconomic policy makers and appropriate response in order to anchor inflation expectations and stabilize the inflation on a long-term basis. The National Bank carefully monitors the macroeconomic data and risks and 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.