The key interest rate has been increased to 1.75%

Skopje, 11 May 2022

On 10 May 2022, the National Bank Operational Monetary Policy Committee held its regular meeting and discussed the latest developments on the international and domestic financial markets and the indicators of the domestic economy in the context of the monetary policy setup.

After the changes in the reserve requirement and the increase in the key interest rate in April to 1.5%, as a preventive response to the upward movements in inflation expectations, at its May meeting, the Committee decided to further increase the interest rate by 0.25 percentage points, to the level of 1.75%. The supply of CB bills at today's auction is Denar 10 billion.

When making such decision, one took into account the latest developments in inflation, which accelerated in April, as well as the impact of such performances on inflation expectations. The decision to further tighten the monetary policy is based on the assessments that the import price pressures are longer-lasting and stronger, which creates certain transmission effects on several price categories and affects inflation expectations, hence the need for monetary response, despite the downward risks to economic growth and domestic demand.

The latest data show that inflation, in April 2022, accelerated and reached an annual rate of 10.5%, which suggests that this year inflation will be higher than expected according to the latest forecasts. The movements in domestic inflation are also in line with the global inflation, including with the inflation in the region of Central and Southeast Europe, where the average inflation for April is around 11%. Major factors for the shifts of the price level still include the factors on the supply side, primarily the prices of food and energy, due to the growth of the prices of primary products in world markets. These transmission effects are especially visible in economies like ours, where most of the consumption is imported and where the share of food and energy in the consumer basket is high. Given that food and energy are the input component in several other products and services, the price growth becomes widely predominant. Hence, core inflation accelerated as well. The current assessments continue to indicate absence of more pronounced pressures from demand on prices, and the war conflict in Ukraine emphasizes the downward risks to domestic demand in the period ahead. However, there is a need for prudent domestic policies that will not cause additional pressures on the consumption side.

Foreign reserves remain within the safe zone. Given the high level of foreign reserves in the pre-pandemic period and the further growth in both years of the pandemic, currently the foreign reserves are at the appropriate level in accordance with all international standards. Since the beginning of the year, the foreign exchange market registered increased needs for foreign currency by the companies due to the higher energy imports, in conditions of significant growth of the world prices of these products. During April and May these pressures significantly decreased, together with the pressures associated with the unfounded speculations about the exchange rate, whereby the foreign exchange market is currently stable, and there is also а seasonally higher supply of foreign currency.

Regarding the developments in the real economy, 2021 registered a real economic growth of 4%, within the expectations. Available high frequency data for the first quarter of 2022 point to further growth of the domestic economy in this period. But, the war escalation between Russia and Ukraine from the end of February, further deteriorated the already disturbed global value chains and the energy market, as well as the confidence of economic agents. This worsened the expectations for growth of the global, and primarily of the European economy, which adversely affects the economic prospects and the recovery dynamics of the domestic economy for this and for the next year, i.e. the growth would be lower than expected.

Regarding the monetary sector developments, according to the initial data for April 2022, the annual growth of loans remained solid, amid more moderate growth in deposits. Household deposits increased on a monthly basis in April.

Overall, the recent estimations for the main macroeconomic parameters indicate a need for further tightening of the monetary policy, despite the downward risks to economic growth and demand. The risks to the entire macroeconomic context are more pronounced, and are mainly related to the external environment. The effects of the pandemic still exist, and the disturbances in the value chains and the energy crisis are even more pronounced due to the war conflict in Ukraine. There is still great uncertainty, especially about the duration and intensity of the war in Ukraine and the effects of the current and future sanctions against Russia. Hence, there is a need for prudent macroeconomic policies which will be targeted, in order to mitigate the effects of the crisis, but taking into account inflationary pressures. The National Bank will continue to carefully monitor the trends and potential risks and will respond accordingly in order to gradually normalize the monetary policy.