Regular meeting of the Operational Monetary Policy Committee of the National Bank
Skopje, 14 July 2021
The monetary policy setup is assessed as appropriate to the macroeconomic conditions
On 13 July 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 assessed that the existing level of the key interest rate is appropriate to the current economic and financial conditions, and decided to remain the same, at the level of 1.25%, whereby the monetary policy retained its relaxed character. The current decline in the key interest rate, as well as the significant reduction of the offered amount of CB bills, contributed to increasing liquidity of the banking system and supporting credit flows in the economy. At its meeting, the Committee confirmed that the total liquidity released through the main National Bank instrument from the beginning of the pandemic is appropriate, and decided at today’s auction to offer the same amount of CB bills of Denar 10 billion.
According to the latest available macroeconomic indicators of the economic activity, the gross domestic product in the first quarter of 2021 registered a real fall of 1.9% on an annual basis, in conditions of a third COVID-19 wave and its negative impact on the dynamics of the economic recovery. Such dynamics of the economic activity in the first quarter was expected within the April forecasting round. The currently available high-frequency data for the period April - May suggest a high annual growth of the economic activity in the second quarter, primarily due to the low base effect, which is related to the tough measures introduced to prevent the spread of COVID-19 in this period from the last year, and partially due to the stabilization of the epidemiological situation and the started immunization in the country. Namely, the data for this period show high annual growth rates in industrial output, total trade turnover and catering.
Regarding the inflation developments, the average annual growth of consumer prices in the first half-year of 2021 amounts to 2.4% and is close to the expectations of the April forecasting round of the National Bank. Regarding the expected movements of import prices, the latest revisions are in an upward direction. Moreover, there is still pronounced uncertainty regarding the movement of world primary commodity prices in the next period, according to the uncertain economic effects related to the pandemic and the prospects for dealing with it.
At the end of June 2021, the foreign reserves are higher compared to the end of the first quarter, whereby they are still at the appropriate level and within the safe zone. Regarding the available external sector data for the second quarter of 2021, the data for April and May currently indicate a higher trade deficit than expected for the second quarter of the year. The latest data on currency exchange operations indicate higher net inflows in private transfers than expected for the second quarter of 2021.
Observing the monetary sector, the movements still show a solid annual pace of growth of deposits and loans, and according to the initial data as of June 2021, the annual deposit growth is in line with the expectations, while the growth in loans is above the forecast.
In the period between the two meetings of the Committee, the liquidity in the banking system remained at a relatively solid and stable level, and banks traded in short-term denar liquid assets on the money markets occasionally, at the end of June. In June, the increase in the net purchase of foreign currency from exchange offices continued on the foreign exchange market, whereby the amount was higher compared to the same month last year, but also compared to June 2019 before the beginning of the health crisis. The net demand of foreign currency of the corporate sector remains relatively stable and was almost entirely covered by the banks' foreign assets. The foreign exchange market was relatively favorable and in the current flow of July. The National Bank had insignificant sales interventions, made at the beginning of June.
In June, the international financial markets were predominated by the expectations for support of the economies by policy makers and optimism, due to the reduced number of newly infected persons with the coronavirus. Namely, in order to maintain favorable financial conditions for a longer period, despite the signs of recovery of the economies and the inflation growth for which it was assessed that it is of a temporary character, the largest central banks continued to conduct a relaxed monetary policy and kept the voluminous programs for easing of the conditions for financing of the private sector. In such circumstances, the yields on the safest government bonds in the euro area and the United States are still at relatively low levels.
Overall, at the meeting of the Committee it was concluded that the movements in the main macroeconomic parameters are currently within the expectations. The uncertainty and risks from the further course of the COVID-19 pandemic are still present. In the period ahead, the National Bank will carefully monitor the trends and potential risks, in order to respond in an appropriate manner, if necessary.