Skopje, 11 March 2020
On 10 March 2020, the National Bank's Operational Monetary Policy Committee reviewed the key indicators of the domestic economy and the trends in international and domestic financial markets, in the context of monetary policy setup.
Following the rate cut in January 2020, the Committee assessed that the current monetary setup was appropriate, and decided to keep the CB bill rate at 2%. It was also decided to keep the amount of CB bills offered at the auction on 11 March 2020 at a level of Denar 25,000 million. The decision to keep the monetary setup unchanged has reflected the favorable developments in the domestic economy, which are as expected, amid exacerbated risks and uncertainties for the global economy caused by COVID-19.
In terms of economic activity, the released GDP data for the fourth quarter of 2019 indicate faster economic growth than expected, and the performance for the whole 2019 is in line with the October forecasts. Namely, the estimated official GDP data for the fourth quarter of 2019 show solid economic growth of 3.4% on an annual basis. Thus, the real economic growth in 2019 reached 3.6% (expected growth of 3.5%). The growth in 2019 is generated by domestic demand, driven by gross investment, with significant positive contribution by private consumption. The growth of demand and export components also contributed to imports growth, with adverse contribution of net exports to overall economic growth. For the first quarter of 2020, given the limited volume of available data, it is difficult to give a more accurate assessment of the state of economy.
Analyzing inflation, in the first two months of 2020, the average annual growth rate of consumer prices was 0.7%, which is still lower than the October forecast. Amid pronounced downward adjustments of the expected future movement in import prices, currently the risks to the inflation forecast for 2020 of 1.5% are assessed as downward. The uncertainty about the expected movement of world prices of primary commodities in the coming period still exists and is more pronounced.
Foreign reserves performance in 2019 and the first two months of 2020 are slightly better than expected, with the level of foreign reserves still in the safe zone. According to the available external sector indicators, the foreign trade data for January 2020 indicate slightly lower trade deficit than forecasted for the first quarter of the year. Currency exchange market data as of February indicate net inflows of private transfers, as expected for the first quarter of 2020. Balance of payments for 2019 point to a higher current account deficit than the October forecast (2.8% of GDP, as opposed to the forecast of 1.3% of GDP), but also a significantly better position of the financial account (net-inflows of 5.4% of GDP, compared to the forecast of 3.6% of GDP).
Regarding the movements in total deposits and total loans, the preliminary data as of February show further annual growth of both deposits and loans, with the performances indicating no major deviations from the forecast.
In the period between the two meetings of the Committee, the liquidity of the domestic banking system remained relatively stable and high, which contributed to the small need for banks to borrow on the interbank market of unsecured deposits. In such circumstances, banks continued to reallocate excess Denar funds to available deposits with the National Bank, which allows for high flexibility and availability of funds for smooth lending to domestic entities and other types of investments.
On the domestic foreign exchange market in February, banks for the needs of their clients made moderate net sales of foreign currency compared to the first month of the year. The seasonally lower demand for foreign currency by the corporate sector was the main generator of this movement in the foreign exchange market. The banks have met the clients' net demand for foreign currency from the available foreign currency assets, and in order to offset the short-term changes to the foreign exchange liquidity in the banking system, the National Bank has twice sold a total of Euro 5 million.
In February, the spread of coronavirus outside China raised investors' concerns in international financial markets about the negative impacts on global economic growth. In such circumstances, investors were more interested in investing in secure financial assets (gold and government bonds) whose prices rose, amid significant drop in world stock prices. Global uncertainty and financial market developments in early March necessitated the coordination of G7 member countries' policies, which expressed their readiness to apply all available instruments for achieving strong and sustainable economic growth. Shortly after this event, the Fed held an extraordinary meeting and decided to significantly reduce the policy rate target, and market participants have been expecting further changes in the same direction by the central bank in recent days. The uncertainty about the future measures of the developed economies, as well as the large volatility in the international financial markets, which in the past few days resulted in a significant decline in oil prices, stock indices and the US dollar/euro rate, will be actively monitored by the National Bank in the period ahead to properly assess their effects on the domestic economy and the need to take any measures.
Overall, the Committee concluded that the latest macroeconomic indicators in the domestic economy were generally in line with expectations, but the risks from the environment have been increasingly pronounced. COVID-19 pandemic has affected the global economy, and its economic effects as a whole are still uncertain and depend on the duration and severity of this unexpected uneconomic shock. The National Bank will continue to closely monitor the trends and potential risks of the environment in order to properly adjust the monetary policy setting.