OMPC: Reduced policy rate, further reduction of the offered amount of CB bills and expansion of the scope of instruments for injecting denar liquidity into the banking system

Skopje, 13.5.2020

Yesterday, the National Bank's Operational Monetary Policy Committee (OMPC) held a meeting, discussing the key indicators of the domestic economy and movements in the international and domestic financial markets, in the context of the monetary policy setup. 

After the policy rate cut in January and March, at this meeting the Committee decided to cut it again by 0.25 percentage points to 1.5%. Also, after the reduction of the amount of CB bills offered at the April auction, it was also decided to reduce the supply of CB bills by another Denar 7 billion at the auction today. Together with the funds released by reducing the offer of CB bills at the auction in April, the total released amount equals Denar 15 billion, which is expected to provide further support to the Macedonian economy by stimulating credit activity of the banking system. 

The decision for further monetary relaxation is based on the stabilization of the expectations and the trust of the economic agents in recent period, evident through the improved movements in both, the foreign exchange market and the deposits in the banking system. These circumstances, having also in mind the comfortable level of foreign reserves and moderate inflation, as well as the assessment of adverse effects of the health crisis on economic activity in the short run, create a room for further support through the monetary policy.

This monetary policy relaxation is expected to reduce the financing cost through bank lending, as well as to provide additional liquidity in the banking system, which the banks can use to support the domestic economy by enhancing the lending activity and mitigating the effects of the negative shock on the domestic economy.

The OMPC also decided to make further changes that will enable the central bank to give banks a greater access to liquidity, if such a need arises in the forthcoming period, which indirectly paves the pathway for larger credit support to the economy. More specifically, these changes have expanded the scope of securities that the National Bank can accept from domestic banks as instruments for providing denar liquidity in the banking system. Thus, when conducting monetary operations for the purchase of securities on a temporary or outright basis, the National Bank will be able to accept domestic government bonds with the longest maturity (15 and 30 years), as well as Eurobonds issued by the state on international financial markets, which are owned by domestic commercial banks. 

The Committee reviewed the latest developments in the domestic economy in the context of the new April macroeconomic projections, concluding that despite the already visible adverse effects on the economy related to the COVID-19 shock, economic fundamentals remain sound. The absence of imbalances is evident through low inflation and stable foreign exchange market movements in recent period. 

In terms of the latest macroeconomic indicators, after the relatively solid growth of the economy in 2019, the currently available high-frequency indicators of economic activity in the first quarter of this year indicate continued growth, but at a slower pace. Namely, despite the favorable movements in the first two months of the year, the first effects of the corona crisis are observed in March, and are evident through the reduced activity in industry and trade. In construction, and during the second month of the year, a high activity growth was registered. 

The average annual inflation rate in the first four months of the year was 0.4%, with inflation expectations expected to be around 0% this year and balanced projection risks.

The level of foreign reserves remains in the safe zone, with the performance in line with the expectations. Regarding the available information on the external sector, the data on foreign trade as of March this year indicate a widening of the annual trade deficit in the first quarter - movements that are included in the latest published National Bank forecast. Data on the exchange offices market as of the second decade of April indicate net inflows from private transfers that are slightly lower than expected for the second quarter of this year, although the period for a more precise assessment is very short. 

Regarding the movements with the total deposits and total loans, the initial data for April show their further growth on an annual basis, although with more moderate dynamics, which matches the execrated trajectory within the forecast.

The indicators of the domestic financial markets show gradual stabilization of the movements on the foreign exchange market, with the expectations of the natural persons being normalized. Namely, since the end of April, there has been a constant decrease in the demand for foreign currency by natural persons, which means that it is gradually returning to its usual level before the corona crisis outbreak. In such circumstances, in the second half of April the National Bank has occasionally intervened in the foreign exchange market by selling a total of Euro 28 million. Since the beginning of May, the central bank has not intervened in the foreign exchange market. 

Regarding the external environment, the measures to temporarily suspend activity in certain economic activities in countries around the world have resulted in a significant decrease in global economic activity, visible through GDP indicators for the first quarter of the year and other high-frequency indicators. In such circumstances, in April, the holders of monetary and fiscal policies of developed and developing countries continued to provide adequate support to domestic economies. Such developments have contributed to the stabilization of investors' expectations in the international financial markets and, accordingly, to the reduced variability of the prices of financial instruments. 

At the meeting it was concluded that external and domestic risks to the economy remain. In the current circumstances, with the indicators relevant to monetary policy being stabilized, there is room for further monetary relaxation, in order to support the economy. In the next period, the National Bank will closely monitor the trends and potential risks, in order to respond adequately by adjusting the policies and taking additional measures, if necessary.