Skopje, 1 November 2023

The policy rate remains at the level of 6.30% - monetary policy is still tightened

On 31 October 2023, the National Bank’s Operational Monetary Policy Committee held a regular meeting and discussed the latest data and information on the global and domestic economy and the latest developments on the international and domestic financial markets in the context of the monetary policy setup.

At this meeting, the Operational Monetary Policy Committee did not make additional changes to the monetary policy. Namely, the Committee decided to keep the interest rate on CB bills at the level of 6.30%, with simultaneous maintenance of the interest rates on overnight and 7-day deposit facilities at the levels of 4.20% and 4.25%, respectively. The supply of CB bills at the regular auction remains unchanged and amounts to Denar 10 billion.

The current level of the policy rate, combined with the changes in the reserve requirement, as well as with the macro-prudential measures undertaken so far, will contribute to further slowdown in inflation and maintenance of the stability of the exchange rate. The tightening of the monetary policy started since the end of 2021, first through the interventions on the foreign exchange market and the optimal liquidity management, and then from April last year also by increasing the policy rate, on a total of 14 occasions so far. 

The latest monetary policy decision is mainly conditioned by the movements and assessments of the key indicators of monetary policy, with special emphasis on inflation. Domestic inflation continues to slow down but at a stronger pace, reducing to 6.6% on an annual basis in September 2023. The slowdown in the annual inflation rate is a result of the slower growth of the prices in all three components, with the greatest contribution from the food component. However, total inflation slows down at a slightly weaker pace than expected according to the latest forecasts, and its level is still above the historical average. On the other hand, the core inflation rate slows down entirely in line with the expectations, suggesting a decrease in price pressures from the less volatile price categories, and in accordance with the undertaken monetary measures. The latest expectations for the import prices, i.e. the world prices of primary products, have been revised mainly downwards, whereby the expectations for a price fall in the next period still prevail. The risks from the external environment regarding the future price movement remain unfavorable and uncertain, primarily due to the unpredictable character of the war in Ukraine and most recently, in the Middle East, as a new risk factor.

Regarding the policy of the European Central Bank (ECB), after a cycle of ten consecutive increases, at its latest meeting in October, the ECB did not make further changes, i.e. it kept the same level of the policy rates, on the basis of assessments that the current changes give the expected results and with expectations for maintenance of the current high level of interest rates for a longer period.

The foreign exchange market is stable and the movements are favorable. The level of foreign reserves at the end of September is in accordance with the international standards for the maintenance of the stability of the exchange rate of the domestic currency. From the beginning of the year, foreign reserves increased, amid favorable movements on the foreign exchange market and interventions with a net purchase of foreign currency by the National Bank since the beginning of the year. This is a reflection of the reduced pressures from the energy crisis, and thus the smaller demand by companies, the increased net purchase by natural persons as a signal for the confidence in the domestic currency, as well as the generally good foreign currency liquidity of banks. Regarding the latest available data from the external sector, the trade deficit in the period July - August 2023 is lower than expected according to the April forecast, and the data on currency exchange operations as of September 2023 are in accordance with the expected net inflows from private transfers for the third quarter.

In terms of domestic economic activity, the real GDP growth in the second quarter of 2023 slowed down, reducing to 1.1% on an annual basis (following the growth of 2.1% in the previous quarter), coming closer to the growth forecasted for this quarter according to the April forecasting round. The currently available high-frequency data for the economic activity for the third quarter of 2023 indicate a slower economic growth in this quarter, relative to the April expectations. Also, the latest expectations suggest a downward revision of the growth of foreign demand by the end of 2024, with prospects for a slower recovery of the domestic economy in the next period.

In the monetary sector, the latest data as of September 2023 still indicate a faster growth of deposits compared to the April expectations, and the lending activity continues to slow down, given the expected dynamics.

Overall, the conditions for conducting the monetary policy remain uncertain and point to a need for careful monitoring of the dynamics and factors of inflation, as well as of inflation expectations. This also implies vigilance in the conduct of macro-economic policies affecting the demand in the economy. The National Bank is still ready to use all the necessary instruments and to take appropriate measures that will contribute to maintenance of the stability of the exchange rate, stabilization of inflation expectations and to medium-term price stability.