Regular meeting of the Operational Monetary Policy Committee of the National Bank
Skopje, 11 Novembr 2020
On 10 November 2020, the National Bank Operational Monetary Policy Committee held its regular meeting and discussed the developments on the international and domestic financial markets and the indicators of the domestic economy in the context of the monetary policy setup.
Following the cut in the interest rate on CB bills on three occasions since the beginning of the year, at this meeting, the Committee decided to keep it at the level of 1.5%. The decline in the key interest rate to the current level, as well as the current significant reduction of the offered amount of CB bills, contributed to increasing liquidity of the banking system and supporting credit flows in the economy. Given the already performed relaxation, and amid still present risks, at this meeting, the Committee decided to to keep the interest rate on CB bills at the current level, as appropriate to the current economic and financial conditions. At the same time, the Committee assessed that the liquidity released through the main National Bank instrument of Denar 15 billion in April and May is appropriate, and decided at today’s auction to offer the same amount of CB bills of Denar 10 billion.
The latest available indicators of the economic activity for the third quarter indicate a slowdown in the fall, in conditions of reduction of the restrictive measures and adjustment of the behavior of entities to the new circumstances. Visible slowdown is registered in the annual rates of fall in industry, which is in line with the recovery of the export activity. There are slightly better performances in construction, the turnover in catering and in trade. Private consumption and investments indicators also suggest a certain recovery in this period. Regarding the forecasts of the National Bank, the weaker performance in the first quarter, as well as the estimates for prolonged effect of the health crisis suggest downward risks for the economic outlook.
Inflation in the first ten months of 2020 remains moderate and stable and averages 1% on an annual basis. Structurally observed, food prices make a dominant contribution to headline inflation, with a positive contribution of core inflation. The energy component continues to decline in line with the shifts of the world energy prices. The realized inflation is above the forecast for 2020 of 0% in 2020. In conditions of reduction of the economic activity and fall in import prices, such deviations suggest an influence of specific factors related to the pandemic on the supply and demand on the prices of certain products. In the next period, the risk of volatility of import prices remains, especially in conditions of pandemic.
The latest data on the foreign reserves show that they are still at an appropriate level and are maintained in a safe zone. From the beginning of the year, the foreign reserves register an increase, supported by the funds provided through external sources of financing. External sector data show a reduction of the trade deficit, in line with the expectations. At the same time, there is also a gradual stabilization of the supply on the currency exchange market. Overall, the external position of the economy is stable, visible through the absence of a greater need for interventions by the National Bank.
Analyzing total deposits and total loans, the initial October data show further solid annual growth, which is in line with the expectations.
In the period from the last, October meeting of the Committee onwards, the liquidity of the banking system in domestic currency continued to increase, which contributed to an occasional and low need of banks to trade in short-term denar liquid assets on the money markets. The performances in the domestic financial markets in October indicate a further continuation of the favorable movements in the foreign exchange market. This trend is mainly driven by the further increase in the supply of foreign currency by natural persons on the currency and foreign exchange markets, which in October reached the highest level since the beginning of the health crisis. These developments, as well as the maintenance of the foreign currency liquidity of banks at a relatively stable level, contributed for the National Bank to have a rare presence on the foreign exchange market during October, through low interventions for sale of foreign currency to domestic commercial banks.
In October, central banks worldwide continued to conduct expansive policies, and the developments on the international financial markets were mainly determined by the growing concern of investors due to the second wave of spreading of the coronavirus and the restrictive measures (mainly in Europe) taken for prevention of the negative effects and the spread of the virus. The developments on the international financial markets were additionally affected by: the indication of the possibility for further relaxation of the monetary policy by the ECB, the information about the fiscal support in the USA, as well as the resumption of the Brexit negotiations between the EU and the United Kingdom. In such circumstances, the value of the US dollar against the euro increased, and the prices of the safest government bonds in the euro area moderately increased. At the beginning of November, the value of the US dollar moved in the opposite direction, mainly in conditions of uncertainty about the outcome of the presidential elections in the USA and the future structure of the U.S. Congress, and then after the declared victory of the candidate of the Democratic Party.
Overall, at the meeting of the Committee it was concluded that the flows have thus far been stable, and the perceptions for the monetary policy environment are unchanged compared to the previous assessment. Uncertainty and risks from the future macroeconomic effects of the pandemic caused by COVID-19 persist, both globally and within the domestic economy. In the period head, the National Bank will carefully monitor the trends and potential risks, in order to respond in an appropriate manner, if necessary.