Regular meeting of the OMPC: The policy rate and the offer of CB bills remain unchanged. The economic performance is generally as expected by the National Bank.

Skopje, 16 September 2020

The Operational Monetary Policy Committee of the National Bank held a regular session on 15 September 2020, where the movements of international and domestic financial markets were reviewed as well as domestic economy indicators in terms of monetary policy setup.

After cutting the interest rate of CB bills on three occasions since the beginning of the year, the Committee decided to maintain its level of 1.5%. The cut of the key interest rate to the current level, as well as the significant reduction of the offered amount of CB bills, led to increase of liquidity of the banking system and support of credit flows in economy. Given the already relaxed monetary policy, the committee decided to keep the interest rate of the CB bills at the current level, as appropriate to the economic and financial conditions. At the same time, the Committee assessed the released liquidity of Denar 15 billion through the basic instrument of the National Bank in April and May as appropriate, whereby decided to offer CB bills in unchanged amount of Denar 10 billion at the auction held today.

The latest macroeconomic indicators show a decline in the gross domestic product in the second quarter of 12.7%, fully in line with the projection by the National Bank according to which the expected decrease was 12%. After the minimal growth of the economy in the first quarter of only 0.2%, in the second quarter, the economy recorded the expected deepest annual decline so far, due to the effects caused by the COVID-19 pandemic. Currently available high-frequency data on the third quarter of 2020, lead to moderate negative effects by the health crisis on economic activity. This is evident by the slowdown in the annual decline rates of industry and trade in July, while on a monthly basis there was growth in both sectors.

The average annual inflation rate remained at a relatively low and stable level, amounting 0.8% for the first eight months of the year, mainly due to higher food prices. In terms of projection, such performances are above expectations for 0% inflation rate in 2020. In such conditions, amid different directions of revision in import prices and their great volatility especially in terms of global pandemic, the uncertainty about the realization of inflation projection for 2020 has increased.

The foreign exchange reserves remain at an appropriate level and are maintained in a safe zone. In the period July-August, the main factors that influenced the change of foreign reserves are the regular repayments of public sector liabilities abroad and interventions of the National Bank on the foreign exchange market. Available external sector data on the third quarter are mainly limited. The foreign trade statistics data including July point to the possibility of achieving a higher trade deficit than expected for this period, but the assessment period is very short for making more specific conclusions. The data on the balance of payments for the second quarter point to a lower deficit on the current account, as well as higher net inflows in the financial account compared to the projected for the second quarter.

In terms of movements in total deposits and total loans, the preliminary data for August show their further solid annual growth, higher compared to the projection for the third quarter of the year.  

Between the two sessions of the Committee, the liquidity position of the banking system in domestic currency remained at a relatively solid level, with banks occasionally trading short-term Denar liquid assets on the money market. Domestic financial market indicators for August also point to moderately improved movements on the foreign exchange market, given the further seasonal effect of higher supply of foreign currency by natural persons on the exchange and foreign exchange market, but also moderately lower need for foreign currency in the corporate sector. Such developments, followed by improved foreign exchange liquidity of the banking system, contributed for lowest (euro 21.5 million) monthly interventions and less frequent presence of the National Bank by selling foreign currency to banks, supporters of the foreign exchange market, since the crisis onwards. The more stable trends on the foreign exchange market continue in the beginning of September, when the banks purchase foreign currency on net-basis from economic entities, and the National Bank has no interventions.

Amid increased expectations of a vaccine for COVID-19 and a gradual recovery of the global economy, optimism was noted in international financial markets in August, followed by rising stock prices and other high-yield financial instruments. At the same time, the investors were less interested in safer financial instruments, which led to a decline in government bond prices issued by Euro zone countries and USA, which were moderate and limited in terms of further implementation of expansionary monetary policies of central banks.

In summary, the Committee concluded that the latest macroeconomic indicators are mainly in line with the expectations of the National Bank, amid unchanged perceptions on the monetary policy environment compared to the previous assessment. Uncertainty and risks of future macroeconomic effects of the COVID-19 pandemic are still present, both globally and in domestic economy. In the next period, the National Bank will closely monitor the trends and potential risks as well, in order to respond appropriately by adjusting the monetary policy if necessary.