Regular meeting of the Operational Monetary Policy Committee of the National Bank
Skopje, 16 July 2020
On 14 July 2020, the Operational Monetary Policy Committee held a regular meeting and discussed the latest domestic economy indicators and the developments on the international and domestic financial markets in the context of the 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 1.5%, 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, 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. In general, the spread of the coronavirus globally hit the domestic businesses with a more pronounced effect on the confidence and expectations of companies and consumers in the second quarter. Following the decelerated economic growth in the first quarter of this year, the currently available high-frequency data for the period April-May indicate lingering economic contraction caused by the health crisis (further decrease in industrial production and turnover in trade and hospitality, and after growth in the first quarter, a decline was also observed in construction).
In terms of inflation, price changes for the second quarter are slightly higher than the forecast for the second quarter, but they are influenced by factors on the supply side. In such conditions and different directions of revision of import prices and variability of prices of primary commodities, there is uncertainty about the inflation forecast of 0% for 2020.
Foreign reserves are still in the safe zone, and the performance during the second quarter is slightly better than expected. The available external sector data for the second quarter indicate more pronounced negative impact on the domestic economy from the spread of the coronavirus during the second quarter. However, observed by month, the effects were most pronounced in April as expected, while the May data point to a gradual recovery and possible achievement of the trade deficit expected for the second quarter. On the other hand, the foreign exchange market data as of June indicate lower net inflows from private transfers than expected for the second quarter, amid a decline in both supply and demand for foreign currency.
Analyzing total deposits and total loans, the initial June data show solid annual growth, slightly higher than the forecast for the second quarter of the year.
In the period between the two Committee meetings, the banking system liquidity remained relatively sound and solid, as confirmed by the absence of need for banks’ borrowing on money markets. The indicators for the domestic financial markets for June point to relatively stable movements in the foreign exchange market, which indicate a further gradual improvement of the expectations of natural persons and economic agents. These developments were accompanied by a solid growth of the banks’ foreign exchange liquidity, which was also attributable to the National Bank sale of foreign currency. Since the beginning of July, there has been a moderate net demand for foreign currency by economic agents which made the National Bank reduce the sale of foreign currency to market makers from the beginning of the month until 13 July 2020, to only Euro 3 million.
In June, the initial signs of global economic recovery further strengthened investor optimism in international financial markets, followed by a noticeable increase in stock indices. However, the uncertainty over the duration of the global economic recovery and the concerns of a second wave of coronavirus spread have also contributed to a moderately downward movement in the yields on the safest government bonds in the euro area and conditioned further economic support by the monetary and fiscal policy makers worldwide.
Overall, the Committee concluded that the flows has thus 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 within the domestic economy. In the period ahead, the National Bank will carefully monitor the trends and potential risks and respond by appropriate policy accommodation.