The National Bank continues to tighten monetary policy: interest rates increased by additional 0.5 percentage points

Skopje, 8 February 2023  

On 7 February 2023, the National Bank’s Operational Monetary Policy Committee held a regular meeting and discussed 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. 

At its meeting, the Committee decided to increase the interest rate on CB bills by 0.5 percentage points to the level of 5.25%. The supply of CB bills at the regular auction remains unchanged and amounts to Denar 10 billion. In accordance with the increase in the key interest rate, a higher interest rate on overnight credit will also be applied. At its meeting, the Committee decided to increase the interest rates on overnight and seven-day deposit facilities as well, by 0.5 percentage points. These interest rates will become effective from 15.02.2023. With these changes, the National Bank also at the beginning of this year continues to tighten monetary policy, which started since the end of 2021, by applying several instruments, for the purpose of maintaining the stability of the exchange rate and stabilizing inflation in the medium run.

At its meeting, the Committee determined that the performances in the key macroeconomic indicators are mainly in line with the expectations. However, the environment for conducting the monetary policy remains uncertain and requires precaution. Headline inflation started to slow down at the end of the last year, given the reduction of world prices, and it is expected that this trend will continue also in the current year. However, given the strong and long-term external price shocks, despite the favorable movements, inflation is still at a higher level and imposes a need for careful monitoring of inflation expectations. Regarding the other indicators important for monetary policy, the foreign exchange market developments are stable, and there are also more favorable trends in the part of the savings in domestic currency and in the long run.

Given the connection of our currency to the euro, the monetary policy decision-making is also influenced by the changes in the monetary policy of the European Central Bank, which at the meeting on 2 February made a decision to increase the policy rates by 0.5 percentage points.

Regarding the latest indicators, domestic prices in December registered a slight decline, whereby the annual inflation rate continues to slow down, reducing to 18.7%. The average annual inflation rate for the entire 2022 equals 14.2% and is in line with the latest forecasts of the National Bank of 14.3%, and predominantly results from the increase in world prices of food and energy, including the domestic price of electricity and thermal energy and their transmission effect on prices of other products and services, in the absence of enough domestic resources to mitigate these shocks. Uncertainty arising from the future dynamics of the prices of primary products in markets, and especially of energy, still exists due to the military developments in Ukraine and the sanctions against Russia, due to which the conduct of prudent domestic policies and the careful management of domestic demand are still extremely important.

The level of foreign reserves, as of the end of January, meets the international standards required for the maintenance of the stability of the exchange rate of the domestic currency, i.e. they are still at an appropriate level. The developments on the domestic foreign exchange market also during January were relatively stable, whereby the National Bank was only occasionally present on the foreign exchange market. Regarding the latest available data from the external sector, the trade deficit in 2022 is lower than expected, which contributed to improved performance in the foreign reserves. The latest developments on the currency exchange market from the beginning of the year are favorable and are currently in line with the forecasted net inflows from private transfers for the first quarter of 2023.  

As for the domestic economic activity, the performances in the first three quarters of 2022 are very close to the forecasts (the growth is 2.7% given the National Bank forecasts of 2.5%), and the available high frequency data for the fourth quarter are in favor of the expectations that the slowdown of growth will continue until the end of the year. Namely, data for this period show a real annual decline in total trade turnover, after the small growth in the previous quarter, as well as further adverse movements in industrial output and completed construction works. On the other hand, the growth in catering turnover remains high and accelerates on an annual level.

Regarding the monetary developments, in December 2022 lending activity continues to grow on an annual basis, but at a more moderate pace, especially in the household segment, in line with the expectations. Deposit growth accelerated and exceeded expectations, whereby the propensity of households to save in denars and in the longer run, increases.

Overall, the uncertain and volatile environment and the pronounced risks require further precaution by policy makers. 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 stability of the exchange rate, stabilization of inflation expectations and to medium-term price stability.