Regular meeting of the Operational Monetary Policy Committee of the National Bank
Skopje, 14 October 2020
On 13 October 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 macroeconomic indicators point to an annual decline in the gross domestic product in the first half of the year of 6.4%. Regarding the April forecast of the National Bank, this is slightly weaker performance than expected mainly as a result of the deviation for the first quarter, while the performance in the second quarter was entirely in accordance with the National Bank forecast. The currently available high-frequency data for the third quarter of 2020, point to more moderate negative effects of the health crisis on the economic activity, a shift that is expected in the National Bank forecast. This is visible through the slowdown of the annual rates of fall in industry, construction, the turnover in hotels and restaurants, and partially in trade.
The average annual inflation rate is still maintained at a relatively low and stable level, and for the first nine months of the year it equals 0.9%, which is mainly a result of the higher food prices. Regarding the forecast, such performances are above the expectations for 0% inflation rate in 2020. In such circumstances, as well as amid different directions of revision in import prices and their great volatility especially pronounced in conditions of the global pandemic, the uncertainty about the achievement of the inflation forecast for 2020 is increased, with predominantly upward risks.
At the end of the third quarter of 2020, the foreign reserves are at an appropriate level and are maintained in a safe zone, and in the beginning of October, an additional inflow of Euro 80 million was realized on the basis of a government loan within the macro-financial support of the European Commission. The main factors that affected the change in the foreign reserves in the third quarter are the regular repayments of the liabilities of the public sector to abroad and the interventions of the National Bank on the foreign exchange market. Foreign trade statistics data as of August point to the possibility for a trade deficit generally in line with that expected, pursuant to the April forecast.
Analyzing total deposits and total loans, the initial September data show further solid annual growth, which is higher than the forecast for the third quarter of the year.
In the period between the two Committee meetings, the liquidity of the banking system in domestic currency further increased, which contributed to a very low and occasional need of banks to trade in short-term denar liquid assets on the money markets. Indicators for the domestic financial markets for September 2020 point to further improvement of the movements in the foreign exchange market, given the increase in the supply of foreign currency by natural persons on the currency exchange and the foreign exchange markets. These developments were accompanied by maintenance of the foreign currency liquidity of banks at a stable level and contributed to a further reduction, not only of the presence of the National Bank on the foreign exchange market, but also of the amount of interventions for sale of foreign currency of market-makers, which in September was the lowest (Euro 11 million) since the beginning of the crisis. The favorable movements in the foreign exchange market continue also at the beginning of October, when banks purchase foreign currency from economic agents on a net basis, and the National Bank makes no interventions.
In contrast to the optimistic perceptions of the participants in the international financial markets in August, last month there was a growing concern of investors related to: the new wave of spreading of the corona-virus, especially in Europe, the uncertainty about the additional fiscal support in the USA and the Brexit prospects with or without reached trade agreement. In such circumstances, investors had a greater interest in investing in safer financial instruments, and the US dollar was also strengthened. Consequently, the prices of government bonds issued by the euro area countries moderately increased, and the prices of government bonds in the USA were also maintained at relatively high levels.
In summary, at the meeting of the Committee it was concluded that the flows have thus far been stable and the latest macroeconomic indicators are generally in line with the expectations, with unchanged perceptions for monetary environment compared to the previous assessment. Uncertainty and risks from the future macroeconomic effects of the pandemic caused by COVID-19 are still present, 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.