Skopje, 12 August 2020

On 11 August 2020, the National Bank’s Operational Monetary Policy Committee held a regular meeting and reviewed the developments of both international and domestic financial markets as well as domestic economy indicators in the context of monetary policy setup.

After the cut of CB bill rate on three occasions since the beginning of the year, at this meeting it was decided to remain 1.5%. The policy rate cut to the current level, as well as the significant reduction of the offered amount of CB bills further increased banking system liquidity and support for the credit flows in the economy. After the monetary easing, amid current risks, at this meeting it was decided to keep the CB bill rate at the current level, which is in line with the current economic and financial conditions. The committee also assessed that the liquidity released in April and May through the main National Bank instrument of Denar 15 billion is appropriate, and decided at today’s CB bill auction to offer the same amount of Denar 10 billion.

The Committee also reviewed the latest economic indicators in the domestic economy. Following the decelerated economic growth in the first quarter of 2020, the currently available high-frequency data on the second quarter indicate lingering adverse effects of the health crisis on the economic activity, as expected. They are seen through the double digit decline of the industrial production and the trade and hospitality, and after the growth in the first quarter, the construction went down. Still, observed by month, most of the downward correction was concentrated in April and May, while there are signs of recovery in June.

In terms of price changes, the annual inflation in July was 1.3% and 0.6%, for the first seven months cumulatively, mainly because of the higher food prices. Such developments lead to upward deviation against the expected inflation rate for 2020. In such conditions and different directions of revision of import prices and variability of prices especially in times of global pandemic, there is uncertainty about inflation forecast for 2020.

According to all adequacy indicators, the foreign reserves at the end of July were in the safe zone. In July, the changes in foreign reserves were mainly caused by repayment of the public sector’s external debt, and less by the National Bank interventions on the foreign exchange market. The external position of the economy in the second quarter is slightly more favorable than expected amid lower trade deficit than forecasted. Therefore, the export performances were better than expected, amid significant improvement in the activities of part of the export companies in June. The available external sector data for the third quarter of the year are limited.

The initial July data on total deposits and total loans show further solid annual growth, slightly higher compared to the forecast for the second quarter of the year.

In the period between two Committee meetings, the banking system liquidity position in domestic currency was relatively high and solid, causing small and occasional need for banks’ borrowing on money markets. The domestic financial market indicators for July 2020 point to seasonal growth in the foreign currency supply, mainly caused by natural persons on the currency exchange market. This improved the movements on the banks’ foreign exchange market with their customers and further increased the banking systems’ foreign exchange liquidity, which reduced the need for sale of foreign currency by the National Bank. There were relatively favorable trends in the foreign exchange market in early August.

In July, the signs of economic recovery in the euro area and in China, the information on the development of COVID-19 vaccine and further monetary and fiscal support by the largest economies brought optimism among the investors on international financial markets, which increased stock indices globally. These developments were observed until the second half of the month, when due to the investors’ concerns for a second wave of coronavirus spread globally and increased political tensions between the USA and China, the investors’ mood has changed causing the euro area and the US government bond yields to decline.

In summary, the Committee concluded that the flows have so far been stable and the latest macroeconomic indicators are generally in line with the expectations, with unchanged perceptions for monetary policy environment compared to the previous assessment. Uncertainty and risks from the future macroeconomic effects of the COVID-19 pandemic persist both globally and domestically. In the period ahead, the National Bank will carefully monitor the trends and potential risks and respond by appropriate monetary policy accommodation.