Regular session of the Operational Monetary Policy Committee

Skopje, 17 June 2020

Yesterday, the National Bank's Operational Monetary Policy Committee held its regular session, discussing the latest domestic economy indicators and international and domestic financial market developments in the monetary policy context.

After the cut of CB bill rate three times this year, it was decided to keep it at 1.5%. Amid COVID-19 pandemic and anti-coronavirus restrictions that have adversely affected both global and domestic economy, and solid foreign reserves and absence of inflationary pressures, the monetary policy has been relaxed since early this year. The policy rate cut to 1.5%, as well as the significant reduction of CB bills offered have further increased bank liquidity and supported credit flows in the economy. Given the already relaxed monetary policy, at this session it was decided to keep the CB bill rate at the current level, as appropriate to the current economic and financial conditions. Also, liquidity of Denar 15 billion released in April and May through the National Bank main instrument was assessed as appropriate and it was decided the same amount of Denar 10 billion to be offered at today’s CB bill auction.   

The Committee also discussed the latest economic indicators of the domestic economy. Economic activity significantly decelerated in the first quarter of this year to 0.2% year-on-year, despite the growth of 3.4% in the previous quarter. Global events related to COVID-19, as well as the anti-coronavirus restrictions in March contracted business activity of most economic sectors. On the expenditure side, this situation affected domestic demand, which had a smaller positive contribution to GDP growth, which was almost completely offset by the negative contribution of net exports. The weaker domestic demand in the first quarter stemmed from the small decline in gross capital formation, despite its solid growth in the previous quarter, as well as the slowing growth in private and public spending. The currently available high-frequency data on the second quarter of this year have not been comprehensive, but industry and trade data from April point to further and more pronounced adverse effects of the health crisis on economic activity.

In terms of inflation, price changes in the period April-May have so far been in line with the forecasts for the second quarter. In such conditions, and amid various revisions of import prices, the risks to the inflation forecast of 0% for this year are currently assessed as balanced. However, there is still great uncertainty about the future movement of world prices of primary commodities related to coronavirus and the duration of the pandemic.

The level of foreign reserves was maintained in the safe zone, and the performance in the second quarter was mainly as expected. During this month, foreign reserves increased significantly by about Euro 600 million. External sector data for the second quarter are limited, but the available data show a more pronounced negative impact of the spread of coronavirus on the domestic economy, in line with the expectations for strongest adverse effects in April, with gradual recovery in the rest of the second quarter.

The latest foreign trade data for April 2020 indicate that the trade deficit could be within the forecasts, although it takes more than a month to draw reliable conclusions. Currency exchange market data as of May for now indicate lower net inflows from private transfers than expected for the second quarter. Balance of payments data for the first quarter of this year indicate current account deficit as forecasted in April, without major deviations in the financial account forecasts.

The initial deposit and loan data for May show an annual growth, as forecasted for the second quarter of the year.

In recent period, bank liquidity has remained relatively solid as confirmed by the low banks’ borrowing from the money markets. Besides, domestic financial market indicators for May point to moderately improved foreign exchange market trends, which may indicate a gradual stabilization of the expectations of individuals and economic entities. In such circumstances, in May, the National Bank sold moderately less foreign currency on a monthly basis on the foreign exchange market (Euro 53.7 million).

Over the past month, the investors’ risk taking in international financial markets has increased, indicating a certain return to optimism. Companies from several industries in many foreign economies have reopened, with further support from monetary and fiscal policy-makers globally. Consequently, there has been an uptrend in stock market indices, increasing yields of the safest government bonds in the euro area and stabilizing government securities yields issued by the United States.

In general, the Committee concluded that for now the flows are stable and the latest macroeconomic indicators are mainly as expected, with unchanged perceptions of the monetary policy environment from the previous National Bank assessment. The uncertainties and risks of future macroeconomic effects of the COVID-19 pandemic remain present and pronounced both globally and nationally, which also lead to variability in expectations. In the period ahead, the National Bank will closely monitor the trends and potential risks in order to respond by policy adjustment, as appropriately.