Changes to the reserve requirement instrument to support the financing of domestic electricity production from renewable sources. The key interest rate increased by 0.5 pp to the level of 3%

Skopje, 14 September 2022 

On 13 September 2022, a session of the National Bank Council was held, as well as a regular session of the National Bank Operational Monetary Committee. 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 the session of the National Bank Council, it was decided to make changes to the reserve requirement instrument, which encourages the crediting of the domestic electricity production projects from renewable sources. With this decision, the basis for allocating a reserve requirement in denars to banks will be reduced by the amount of newly approved loans for financing domestic electricity production projects from renewable sources. In this way, in conditions of an energy crisis and strong growth in global electricity prices, which affect the foreign exchange market, but also domestic prices and living standards, the National Bank contributes to alleviating pressures and structural problems in the economy. In addition, this measure supports "green finance" and sustainable financing, as a strategic goal in the latest strategic plan of the central bank.

At its meeting, the Monetary Policy Committee decided to increase the interest rate on CB bills by 0.5 p.p. at the level of 3%, and the supply of CB bills at the regular auction did not change and amounts to Denar 10 billion. At this meeting of the Committee, it was also decided to increase the interest rates on overnight and seven-day deposit facilities, by 0.5 percentage points, respectively, to a level of 0.90% and 0.95%, respectively. When making the decision, the movements in inflation were taken into account, which also increased in August, but more moderately. These changes would contribute to further encourage saving in domestic currency, which would be achieved through changes in the banks' interest policy in favor of offering relatively more favorable interest rates on denar deposit products. Having in mind the monetary strategy of a stable exchange rate of the denar against the euro, the changes in the domestic monetary policy also reflect the changes in the ECB setup. The domestic foreign exchange market has stabilized in the past period as well, given the moderate pressures from the energy crisis and an inflow of foreign currency on the foreign exchange market, which significantly exceeds the expectations. In such circumstances, the National Bank continues to buy foreign currency, which contributed to the further increase in the foreign reserves.

The latest data on the inflation show an average inflation in the period January - August 2022 of 11.6% annually and it mainly results from external factors on the supply side. Thus, the biggest contribution to the growth of domestic inflation is the increase in the import prices of food and energy, including the domestic price of electricity and heat energy, which are influenced by developments in the global energy market. However, their longer and stronger growth makes transmission effects on the prices of other products and services and further fuels inflationary expectations, which points to the need for prudent domestic policies. In the past few months, food prices have seen more pronounced downward adjustments on world stock markets, which in the next period may lead to downward adjustments in domestic prices, as well. At the same time, the revisions of the growth expectations for some of these prices are also downward. However, the uncertainty arising from the future movements of of the prices of primary products on the markets, especially energy is pronounced due to the military developments in Ukraine.

Foreign reserves are still in the safe zone, and their level meets the adequacy requirements according to the international standards. Since July, the foreign reserves recorded a constant growth, mainly due to the National Bank interventions on the foreign exchange market, which are extremely high and amount of Euro 183 million for this period. This position of the National Bank contributed to additional increase in the level of foreign reserves, which is above the forecasts for this period of the year.

With regard to the activity in the domestic economy, in the second quarter of 2022 the GDP registered a real growth of 2.8% on an annual basis, which is fully in line with the expectations according to the latest forecasts, i.e. according to the April forecasts the National Bank expected a growth of 2.8%. For the first half of the year, the performance is slightly better than forecasted by the National Bank. Available high-frequency data on domestic economic activity in the third quarter are limited, but due to constant downward revisions in foreign demand caused by the military conflict in Ukraine and the deepening energy crisis, downside risks to growth in the next period are increasing.

From the aspect of the movements in the monetary sector, according to the latest data, the credit activity is still solid and exceeds the forecasts, with a growth in the total deposits, but more moderately than expected being registered.

In August, the international financial markets focused on investors' expectations for further tightening of monetary policy by the largest central banks. At the same time, the expectations that the ECB will increase the policy rates by 75 basis points, which was realized at the meeting at the beginning of September, intensified. In such circumstances, the prices of government bonds in the United States and in the euro area registered a decrease, that is, their yields increased. During the same period, the value of the US dollar against the euro continues to increase.

Overall, risks to the overall macroeconomic context remain pronounced and are predominantly associated with the external environment. The main risk continues to be the uncertainty caused by global geopolitical tensions and their impact on prices and economic activity in a global framework, and above all, on energy supply within Europe. The risks from the COVID-19 pandemic, which has not yet ended, should not be neglected.  In such circumstances, it is necessary to conduct prudent domestic policy. The National Bank carefully monitors the macroeconomic data and the risks related thereto and will continue to use all available instruments, in order to maintain the stability of the exchange rate and the medium-term price stability.