Regular meeting of the Operational Monetary Policy Committee of the National Bank

Skopje, 12 May 2021

On 11 May 2021, the National Bank Operational Monetary Policy Committee held its regular meeting and discussed the developments on the international and domestic financial markets and the indicators of the domestic economy in the context of the monetary policy setup.

At its meeting, the Committee decided to keep the policy rate at 1.25%, thus maintaining relaxed monetary policy. Given the already performed relaxation in March 2021, and amid still pronounced uncertainty and predominantly downward risks related to the pandemic, at this meeting, the Committee decided to keep the interest rate on CB bills at the current level, which was assessed as appropriate to the current economic and financial conditions. The current policy rate cut, as well as the significant reduction of the offered amount of CB bills, increased banking system liquidity and supported credit flows in the economy. The Committee also confirmed that the total liquidity released through the main National Bank instrument from the beginning of the pandemic is appropriate, and at today’s auction, decided to offer the same amount of CB bills of Denar 10 billion.

According to the latest available macroeconomic indicators of the economic activity, in the last quarter of 2020, the GDP fall further slowed down and reduced to 0.7%, while in 2020, economy contracted by 4.5%. The current estimates for the first quarter of 2021 suggest prolonged effects of the health crisis on the economic activity in this period, and thus on the dynamics of the economic recovery, visible through the high-frequency data, and in conditions of a third wave of the pandemic and further restraint of economic agents. However, amid started process of a mass immunization, the domestic economy is expected to gradually recover in the next period, which according to the latest forecasts will take place with intensity of 3.9% in this and the next year. 

Regarding the inflation developments, the annual price growth in April 2021 amounts to 2.7% and is in line with the expectations according to the latest spring forecasts of the National Bank. Structurally observed, energy prices make a dominant contribution to headline inflation, in accordance with the movements of the world energy prices, amid a more moderate positive contribution from food component and core inflation. Risks from a volatility of import prices remain pronounced in the next period, under the influence of the development of the pandemic and the dynamics of the global economic recovery. However, according to the latest forecasts, which incorporate the assumptions for a more significant growth of import prices during this year, domestic inflation is expected to remain moderate and to amount to 2.2% and 2% in 2021 and 2022, respectively.

Foreign reserves are still at an appropriate level and are maintained in the safe zone. From the beginning of the year, the foreign reserves register an increase, supported by external sources of financing of the government. At the same time, during this quarter, the foreign exchange market is favorable and without a need for major presence of the National Bank, which is currently only on the side of the purchase of foreign currency. External sector data for the first quarter of 2021 show a widening of the trade deficit, in line with the expectations. At the same time, according to the latest currency exchange operations data, there is an annual growth of the supply of foreign currency on the currency exchange market. Overall, the external position of the economy remains stable, as confirmed by the latest forecasts of the National Bank for the balance of payments. According to the forecasts, the current account deficit is expected to narrow and to amount to 2.9% and 2.3% of GDP for this and the next year, whereby the financial flows will be sufficient for its financing and additional growth of foreign reserves.

Regarding the movements in total deposits and total loans, the initial data as of April 2021 show their further solid annual growth, which is in accordance with the latest estimates for an average annual growth of deposits and loans of 7.5% and 6.1%, respectively, in 2021-2022.

In the period between the two meetings of the Committee, the excess liquidity in the banking system remained at a relatively stable level, so that banks traded in short-term denar liquid assets on the money markets occasionally, only at the end of April. In April, the foreign exchange market registered a moderately higher net demand for foreign currency by the corporate sector and a relatively stable monthly net supply of foreign assets by natural persons on the currency and the foreign exchange markets. Banks entirely met the net demand for foreign currency from their own foreign assets, which are still at a relatively high level, due to which the National Bank did not intervene in the foreign exchange market.

In April, the investors’ optimism related to the perspectives for the future global economic growth continued to prevail on the international financial markets, which was supported by the announcements of solid financial results of most of the companies in Europe and the United States. In such circumstances, as well as amid favorable prospects for the vaccination process in the EU, the stock exchange indices of shares globally reached new historically highest levels, while the prices of the safest government bonds in the euro area fell. On the other hand, the prices of government bonds in the USA registered an increase which was more pronounced in the medium and long maturities, mainly under the influence of the views expressed in the report from the meeting of the Fed that it is still early to reduce monetary support.

Overall, at the meeting of the Committee it was concluded that the movements in the main macroeconomic parameters remain favorable and without major deviations in terms of the expectations, as confirmed by the latest forecasts which do not suggest some major change of the macroeconomic landscape from the previous assessments. The uncertainty and risks from the COVID-19 pandemic are still present. In the period head, the National Bank will carefully monitor the trends and potential risks, in order to respond in an appropriate manner, if necessary.