As a preventive response to the increasing inflation expectations, the key interest rate increased by 0.25 percentage points

Skopje, 13 April 2022 

On 12 April 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.

At its meeting, the Committee decided to increase the interest rate on CB bills by 0.25 percentage points, primarily as a preventive response to the increasing inflation expectations, in conditions of maintained assessments for absence of more pronounced pressures from domestic demand and downward risks to it in the period ahead. When making this decision, the latest developments in inflation and inflation expectations were the center of attention. Otherwise, the amount of the supply of CB bills at today's auction remained unchanged, i.e. Denar 10 billion.

The latest data show that inflation continues to accelerate and in March 2022 it reached an annual rate of 8.8%. The main factors of the shifts of the price level are still the factors on the supply side, i.e. the prices of energy and food products, due to the increasing import prices. They account for more than three quarters of the growth. However, taking into account that they are an input component of several other products and services, and due to the standstill in the value chains, the other import products are also rising in price, the latest data show that the price growth becomes widely prevalent. This, together with the longer-term price pressure than initially expected, also contributes to upward shifts in inflation expectations. More pronounced pressures from demand on prices are not registered for the time being, and the war conflict in Ukraine emphasizes the downward risks to domestic demand in the period ahead.

Taking into account the strategy of a stable exchange rate of the denar, when making monetary decisions one takes into account also the situation on the foreign exchange market and its impact on foreign reserves. After the initial pressure on the foreign exchange market, which usually occurs in all crises, and which was largely driven by the unfounded speculation about the exchange rate, the pressures gradually decreased and were mainly associated with the higher demand from the energy sector, while the supply from exchange offices registered solid growth, exceeding the level from before the pandemic.

Foreign reserves are maintained in the safe zone. Given the high level of foreign reserves in the pre-crisis period and the further growth in both years of the pandemic, currently the foreign reserves are at a high level in accordance with all international standards.

Regarding the developments in the real economy, 2021 registered a real economic growth of 4%, which is within the expectations of the October forecast (3.9%). The currently available high-frequency data for the period January - February 2022 give mixed signals, with better performances in industry, further reduction of the activity in construction and real annual growth of total trade turnover, but more moderate. The war escalation between Russia and Ukraine from the end of February, which has adverse effects on the global economy and further deteriorated the already disturbed global value chains and the energy market, and also affects the confidence of economic agents, adversely affects the economic prospects for the domestic economy.

In terms of the developments in the monetary sector, according to the initial data for March 2022, the annual growth of loans remains solid and is above the forecasts for the first quarter of 2022, according to the October forecast, amid slightly more moderate growth in deposits than forecasted.

The increased geopolitical tensions and the high inflationary pressures globally created additional uncertainties and risks on the international financial markets that affected the investors’ interest. In March the risk aversion increased due to the deterioration of the financial conditions and the embedded expectations for gradual normalization of monetary policies by central banks. Such movements were also transmitted to the prices of the safest government bonds in the euro area, whose performances were also determined by the announced faster reduction of the purchase of securities at the ECB meeting. The increased expectations for a faster tightening of the Fed policy in conditions of favorable performances in the labor market and solid economic activity encouraged the growth of stock exchange indices and reduced the prices of government bonds in the USA.  

Overall, at its meeting, the Committee concluded that the uncertainty and the risks arising from the escalation of the geopolitical tensions and from their effects, primarily, on the global price growth, but also on the trade flows and demand, amid still uncertain course of the COVID-19 pandemic, require further careful monitoring of the situation. The National Bank will continue to reassess the monetary policy setup on a regular basis, taking into account the latest information from the external environment and the domestic economy. The preparation of the new round of macroeconomic forecasts, which will make a comprehensive reassessment of the macroeconomic landscape and the monetary policy setup, is underway. If necessary, the central bank will respond with its entire available set of instruments to maintain price and macroeconomic stability.