Skopje, 20 September 2023

Changes in the reserve requirement for further support of the denarization and interest rate increase of 0.15 percentage points

On 19 September 2023, meeting of the National Bank’s Council was held, as well as a regular meeting of the Operational Monetary Policy Committee to discuss the latest data and information on the domestic and global economy and the latest developments on the international and domestic financial markets in the context of the monetary policy setup.

According to the current economic and financial conditions, the Council adopted the Decision to increase the reserve requirement allocation rate in foreign currency, to further support the process of denarizaion.  At its meeting, the Operational Monetary Policy Committee decided to increase the interest rate on CB bills by 0.15 percentage points to the level of 6.30%. At its meeting, the Committee also decided to increase the deposit facility interest rates, by 0.15 percentage points, whereby the interest rates on overnight and 7-day deposit facilities will equal 4.20% and 4.25%, respectively. The supply of CB bills at the regular auction remains unchanged and amounts to Denar 10 billion.

In order to enhance the current positive effects on the currency structure of savings, as well as to support the process of monetary transmission, the National Bank Council adopted a decision to additionally increase the reserve requirement rate of foreign currency liabilities of banks from 20% to 21%, with an increase in the percentage of maintenance of the reserve requirements from foreign currency liabilities which is met in euros, from 80% to 81%.  These changes will apply from 20 December 2023. The changes in the reserve requirement, together with the macro-prudential measures taken so far, will contribute to strengthening of the systemic resilience and will additionally support the monetary changes.  The monetary tightening started in the late 2021, first through the interventions on the foreign exchange market and optimum liquidity management, and then, since April last year, with the increase of CB bill interest rate, as well as interest rates on other monetary instruments.

The Decision to change the interest rates has been driven by the latest data and assessments of the monetary policy key indicators, which suggest a gradual stabilization, although the risks remain.  In accordance with the monetary measures taken since late 2021 onwards, as well as the reduced pressures from import prices, the domestic inflation further decelerated and in August 2023 amounted to 8.3% annually.  The core inflation rate decelerated as well, indicating significantly lower price pressures from less volatile price categories, given the steady deceleration of the growth in private consumption.  Regarding the world prices, they are still expected to decrease, amid sharp downward correction, compared to the previous forecasts.  However, the domestic inflation is still relatively high, which poses a risk to inflation expectations.  These aspects, together with the unpredictability of the world markets due to the war in Ukraine, require further prudence in the conduct of monetary policy.  Given the applied monetary strategy, when making monetary decisions one takes into account the setup of the European Central Bank (ECB) policy as well, which at the last meeting increased the interest rates again to further stabilize the inflation in the Euro area.

As for the domestic economic activity, the real GDP growth in the second quarter of 2023 slowed down and reduced to 1.1% annually, from 2.1% in the previous quarter.  Analyzing the structure, the growth results from the net exports, coupled with private consumption, which gradually decelerates.  The performances in the first half of the year are slightly better compared to the National Bank forecasts, yet the external environment risks to the economic dynamics remain unfavorable. The available high-frequency data on the third quarter of 2023 are insufficient to have an overall view of the situation, but the current data for July show slightly adverse movements in the industrial output, as well as a moderate deepening of the real fall in the total trade turnover. 

In accordance with the international standards, the level of foreign reserves at the end of August is appropriate for maintaining the stability of the domestic currency exchange rate. Foreign reserves registered an increase since the beginning of the year, amid favorable developments on the foreign exchange market.  Cumulatively, from January onwards, the National Bank purchased foreign currency, amid extremely favorable developments in the period July-August. Regarding the latest available data from the external sector, the trade deficit in July 2023 is currently lower than expected in the April forecast, but the assessment period is too short to draw more precise conclusions. Currency exchange operations as of August 2023 indicate improved performances and higher net inflows from private transfers, compared to the April forecast. 

The latest data in the monetary sector as of August 2023 still indicate a faster growth of deposits compared to the April expectations, while the lending activity on the credit market is in line with the expectations in the April forecast. 

In general, the latest available data on the key macroeconomic indicators suggest the need for further caution in conducting macroeconomic policies which can affect the demand.  The National Bank carefully monitors the macroeconomic data and risks and is prepared to use all the necessary instruments and to take measures that will contribute to maintenance of the exchange rate stability, stabilization of inflation expectations and to medium-term price stability.