The key interest rate is unchanged and is at the level of 2.50%

Skopje, 10 august 2022

On 9 August 2022, the National Bank Operational Monetary Policy Committee held its regular meeting. At its meeting, the Committee discussed the latest data and information on the domestic and global economy and the latest developments on the international and domestic financial markets.

At its meeting, the Committee decided to keep the interest rate on CB bills unchanged at a level of 2.5%, and the supply of CB bills at the regular auction did not change and amounts to Denar 10 billion. When making such decision one took into account several key factors, primarily the already taken measures for normalization of the monetary policy, as well as the latest developments in inflation and in the foreign exchange market. The foreign exchange market registered significant stabilization in the recent period, and the National Bank intervened by purchasing foreign currencies. Moreover, the pressures from the energy crisis are reduced significantly, while the inflow of foreign currency on the currency exchange market in this period is significantly higher than expected. At the same time, the foreign exchange market also registered certain positive shifts in relation to the demand for foreign currency by the domestic natural persons, which indicates gradual stabilization of the expectations and confidence of domestic entities.

In the past period, the National Bank gradually normalized the monetary policy, in order to maintain the medium-term price stability, by appropriately managing liquidity, as well as increasing the policy rate on four occasions in a row. Such monetary setup was also supported by additional measures, i.e. changes in the reserve requirement in order to affect the process of euroization in a more prudent manner (on two occasions), as well as systemic measures by adopting a decision on introducing a countercyclical capital buffer of 0.5%, which further strengthens the protective mechanisms in the banking system. The increase in the policy rate, together with the current changes in the rates of allocating reserve requirement in domestic and foreign currency, are expected to continue to affect the interest rate policy of the banks for stimulating the savings in domestic currency.

The latest inflation data show average inflation of 10.9% in the period January - July 2022, whereby three quarters of this growth is still explained by the rising prices of food and energy. Hence, the inflation dynamics is still mainly a reflection of factors on the supply side, i.e. of the increase in import prices of food and energy, including of the domestic electricity price, which is under the influence of the developments in the global energy market. However, given the durability of these trends, such pressures quickly spill over on prices and on other products and services and further raise inflation expectations, which points to the need for conducting prudent domestic policies. However, the monthly change of consumer prices shows a certain slowdown, and the monthly growth is largely due to the decision to change the regulated price of electricity. At the same time, the annual dynamics of core inflation remained stable. Also, the latest data and expectations on world markets indicate a gradual easing of price pressures, i.e. the expectations for the food prices have been revised downwards, while the oil prices are expected to stabilize at the end of 2022, and then to reduce. However, the risks on the supply side, especially in terms of the future movements of the energy and food prices are still significantly pronounced due to the military developments in Ukraine, whereby the uncertainty related to the spillover effects on the domestic inflation also remains great.

Foreign reserves are maintained in the safe zone, and their level meets the adequacy requirements according to the international standards. This is due to the high level of foreign reserves in the pre-pandemic period and the further growth in both years of the pandemic. The foreign exchange market developments are currently favorable, i.e. the pressures from the energy crisis at the moment are significantly reduced, while the inflow of foreign currency on the currency exchange market in this period is significantly higher than expected. In such circumstances, the National Bank during July and August intervened by purchasing foreign currencies, which further increases the level of foreign reserves.

The data on the activity in the domestic economy in the first quarter of 2.4%, as well as the estimates for further growth according to the high-frequency data for the period April - June 2022 are currently in line with the latest expectations. The risks for the further period remain downward, in circumstances when the military conflict in Ukraine, the prolonged pandemic and the global geopolitical tensions result in great volatility and unpredictability of the external economic and financial conditions. Thus, this period registered further, but slightly more moderate annual growth in industry, total trade turnover and catering, while construction activity in the period April - May registered a slowdown in the fall. 

In terms of the monetary sector developments, the latest data show further growth in both loans and in the deposit base, whereby the lending activity is above the forecasts, while the dynamics of the total deposit base is slightly weaker than expected.

Regarding the global developments, in July, the international financial markets were predominated by the investors’ concern about the global economic growth, i.e. the risk of recession of the leading economies. In such circumstances, the prices of government bonds in the USA and in the euro area increased, i.e. their yields decreased, and the value of the US dollar against the euro continued to increase. The US dollar temporarily reduced below the parity level against the euro, mainly as a reflection of the demand for safe instruments and the expectations for significant tightening of the monetary policy of the Fed. During the month, the prices of most energy components increased, while food prices decreased.

Overall, risks to the overall macroeconomic context remain pronounced. The main risk still includes the uncertainty caused by the global geopolitical tensions and their impact on prices and economic activity globally. One should not neglect the risks from the COVID-19 pandemic either, which has not yet ended. In such circumstances, the need for conducting prudent domestic policies is even more evident. The National Bank carefully monitors the macroeconomic data and the risks related thereto and will continue to act using all available instruments, in order to maintain the stability of the exchange rate and the medium-term price stability.