The key interest rate increased to 2%, a moderate increase also in the interest rates on overnight deposits and seven-day deposit

Skopje, 15 June 2022  

On 14 June 2022, the National Bank Operational Monetary Policy Committee held its regular meeting and discussed the latest developments on the international and domestic financial markets, as well as the indicators of the domestic economy, in terms of the monetary policy setup. Taking into account the latest information and indicators, it was decided to continue the process of gradual normalization of the monetary policy in order to maintain the medium-term price stability.

Due to the growth of the prices of primary commodities in world markets and the slowdowns in the value chains, which also affect the other types of products, inflation registers upward movements worldwide. Such occurrence is also present in our economy, where a significant portion of the domestic needs are met through imports - we have the highest degree of trade openness among the Western Balkans countries. Taking into consideration the inflation developments, but also the foreign exchange market developments, the National Bank constantly uses all available instruments to manage liquidity and to affect interest rates. Actually, the National Bank interventions on the foreign exchange market, from the last quarter last year onwards, have been continuously decreasing liquidity, and in order to maintain its optimum level, the other instruments are also used, such as overnight deposit, seven-day deposit, repo operations and CB bills. The National Bank also made a new change to the reserve requirement, in order to affect the process of euroization in a more prudent manner, which further affects the demand on the foreign exchange market. This measure is in accordance with the Strategy for denarization of the domestic economy.

Regarding the key interest rate, which is one of the instruments that the National Bank uses, after the increase in April and May (by 0.25 percentage points, respectively), at its June meeting, the Committee decided to increase again the interest rate on CB bills by 0.25 percentage points, to the level of 2%. At this meeting of the Committee, it was also decided to increase the interest rates on overnight and seven-day deposit facilities, by 0.25 and 0.15 percentage points, respectively, to a level of 0.40% and 0.45%, respectively. The supply of CB bills at the regular auction did not change and is Denar 10 billion.

We expect that these measures, in conditions of stability of the exchange rate of the denar, will encourage changes in the interest rate policy of banks in order to raise the interest rates of the savings in domestic currency and further increase the bank deposits in denars.

When making the decision to further tighten monetary policy, one took into account the latest developments in inflation, which continues to rise. In the period January - May 2022, inflation averaged 9.1%, which is moderately higher relative to our latest forecasts in conditions of a more pronounced growth of the prices of primary commodities in world markets. Given the higher growth of primary products, which is also longer-term, there are also spillover effects in most of the products and services, so that there is also an acceleration in core inflation. Such performances further raise inflation expectations, which emphasizes even more the need for conducting prudent domestic policies. The FAO index in the last two months shows downward adjustments in the world food prices, but still the military developments in Ukraine, as well as the situation in the value chains, bring uncertainty for the further movement in inflation.

Foreign reserves are maintained in the safe zone, while the foreign exchange market pressures from the energy crisis are significantly reduced in the last two months. The reduction of the pressures is also a reflection of the favorable developments in the currency exchange market, as well as the reduced propensity of domestic entities to convert the domestic currency into foreign currency. Given the high level of foreign reserves in the pre-pandemic period and the further growth in both years of the pandemic, the foreign reserves are at the appropriate level according to the international standards.

Regarding the developments in the real economy, in the first quarter of 2022, the real GDP increased by 2.4% on an annual basis. Analyzed by component, domestic demand makes a positive contribution to the growth, amid growth in all categories. The most pronounced growth is registered in gross investments, which is associated with the strong growth in imports and the accumulation of stocks of raw materials and energy and the deterioration of the already disturbed global value chains and the energy market. Hence, net exports make a negative contribution to the growth. The high frequency data for the second quarter of 2022 are limited and insufficient to have an overall view of the situation. For the time being, April data show a further solid real annual growth of total trade turnover, while industrial production registers an annual fall, following the growth in the previous quarter.

Regarding the monetary sector developments, according to the initial data for May 2022, the annual growth of loans remained solid and generally corresponded to that forecasted, amid more moderate growth in deposits.

In May, the international financial markets were predominated by the increased expectations of investors for normalization of monetary policies and for higher interest rates. In such conditions, there was a decrease in the prices of the safest government bonds in the euro area, i.e. an increase in their yields, which was also supported by the ECB efforts to reverse the inflation to the target level over the medium term. At its latest meeting, the ECB announced an increase in the policy rates by 0.25 percentage points in July, as well as a new increase in the interest rates in September, and the size of the change will be conditioned by the new medium-term inflation forecasts.

Overall, risks to the overall macroeconomic context remain pronounced and are predominantly associated with the external environment, and the main risk still includes the uncertainty related to the course and duration of the military conflict between Russia and Ukraine and its impact on prices and economic activity globally. Moreover, in such circumstances, the need for conducting prudent domestic policies is even more evident. The National Bank carefully monitors the trends and potential risks and will continue to respond in an appropriate manner towards gradual normalization of monetary policy, using all available instruments, and in order to maintain the medium-term price stability.