Additional increase in the interest rates of the National Bank and further separation of the reserve requirement rates in favor of denar savings

Skopje, 16 November 2022 

On 15 November 2022, 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.

At its meeting, the Committee decided to increase the interest rate on CB bills by 0.75 percentage points to the level of 4.25%. The supply of CB bills at the regular auction remains unchanged and amounts to Denar 10 billion. Given the increase in the key interest rate, the interest rates on overnight credit, overnight and seven-day deposit facilities were also increased by 0.75 percentage points.  Also, at its meeting held on 14 November, the National Bank Council adopted a decision on changing the reserve requirement rates of the banks, in order to further stimulate savings in domestic currency. The change in this instrument, which is the fourth in a row this year, includes an increase in the reserve requirement rate of banks for liabilities in foreign currency from 18% to 19%. The part of the reserve requirement in foreign currency that banks meet in euros has also been increased, from 75% to 77%, which strengthens the effect of the change in this instrument. It is expected that the measure will strengthen the changes in the interest rate policy of the banks and that banks will offer more favorable interest rates on all categories of denar deposits, contributing to stronger growth of savings in domestic currency. At the same time, this change would contribute to optimum liquidity management.

With these changes, the National Bank maintains the continuity of tightening of the monetary policy using a wider set of monetary instruments, which started since the end of last year, for the purpose of maintaining the stability of the exchange rate and the medium-term price stability. Last year, the National Bank actively managed liquidity through interventions on the foreign exchange market and other instruments. From April onwards, the key interest rate has been continuously increasing, with additional changes being made in overnight and seven-day deposit facilities. Such monetary setup is supported and strengthened by the several changes in the reserve requirement aimed at reducing euroization, as well as by systemic measures, i.e. by introducing a countercyclical capital buffer of 0.5%, which further strengthens the protective mechanisms in the banking system.

The changes in the setup of the National Bank policy are a response to the increased price pressures. Inflation accelerated in the last months, mostly due to the rising food prices. This emphasizes the impact of imported price pressures from food and energy on domestic inflation, on which monetary policy has no direct impact. However, taking into account the transmission effects and the raising of inflation expectations, these shifts in inflation impose a need for a monetary response. Given the connection of our currency to the euro, in the decision-making, the changes in the monetary policy of the European Central Bank also have an effect.

Regarding the latest indicators, the annual inflation rate in October reached 19.8%. The acceleration is entirely due to the increase in the prices of certain types of food products in the domestic market. Thus, the average annual inflation in the period January - October 2022 equals 13.2%, of which ¾ are still due to the growth of the prices of food products and energy. Although the factors that contribute to inflation growth are predominantly imported price pressures, they also affect inflation expectations. This is also due to the uncertainty arising from the future dynamics of the prices of primary products in markets, and especially of energy, which is pronounced due to the military developments in Ukraine and the sanctions against Russia. Hence, the conduct of prudent domestic policies and the careful management of the domestic demand are extremely important. According to the current performances and the estimates for import prices, risks to the inflation are upward.

In conditions of further more moderate pressures from the energy crisis and inflow of foreign currency from the currency exchange market, the domestic foreign exchange market remains stable. Also during October, the National Bank intervened by purchasing foreign currency on the foreign exchange market, and the foreign reserves from July onwards have been continuously increasing, whereby their level meets the adequacy requirements in accordance with the international standards. The estimations for the external position of the economy point to major pressures from the energy crisis on the trade deficit, but on the other hand there are improved performances in private transfers, whereby the foreign reserves remain in the comfortable zone which guarantees the maintenance of the stability of the exchange rate of the domestic currency against the euro.

Regarding the activity in the domestic economy, the gross domestic product in the first half of the year registered a moderate real growth of 2.6%. However, the available high-frequency data for the domestic economic activity in the third quarter point to a slowdown in the real economic growth, visible through the significant slowdown in the real annual growth of total trade turnover and the fall in industrial production and completed construction works. This, together with the downward revisions of foreign demand due to the effects of the military conflict in Ukraine and the energy crisis, points to less favorable prospects and downward risks for the growth in the period ahead.

In terms of the developments in the monetary sector, according to the latest data, lending activity and deposits continue to grow, at a more moderate pace in loans, and at a fast pace in deposits, expecting that these trends will continue also in the next period.

Regarding the developments in the global economy and the international markets, the latest indicators from October point to less favorable prospects for the economic growth in the euro area, stabilization of the economic activity in the USA, but also simultaneous maintenance of the inflation growth trajectory. In such circumstances, the most influential central banks (the ECB and the Fed) tightened the monetary conditions, by increasing their policy rates by 0.75 percentage points. The international commodity markets registered further decline in the prices of natural gas and electricity, in conditions of reduced demand due to the unusual warm weather in this period of the year in Europe, and a similar pace was also registered in food prices, amid further moderate reduction of the prices of all individual food products, with the exception of cereals. These downward changes in the prices in US dollars are still in part offset by the appreciation of the US dollar.

Overall, the unfavorable external environment and the pronounced risks require conducting extremely prudent domestic policies. The National Bank closely monitors macroeconomic data and risks. As before, the central bank 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 the medium-term price stability.