Skopje, 18 September 2024

The policy rate decreased by 0.25 percentage points - the prudent monetary policy has been maintained

On 17 September 2024, the National Bank’s Executive Board held a regular meeting on the monetary policy setup and discussed the latest data and information on the global and domestic economy and the latest developments on the international and domestic financial markets in the context of the monetary policy setup. 

At the meeting, it was assessed that the latest conditions in the economy enable the start of gradual prudent normalization of the monetary policy setup. Consequently, the Committee decided to reduce the interest rate on CB bills by 0.25 percentage points, to the level of 6.05%. Interest rates on overnight and 7-day deposit facilities remained unchanged, at the levels of 4.20% and 4.25%, respectively. The supply of CB bills at the regular auction also remains unchanged and amounts to Denar 10 billion. 

Such changes maintain the vigilance in the monetary policy, taking into account the risks associated with the external environment that are still present, but also with the domestic factors affecting the aggregate demand. It is still expected that the level of interest rates, together with the current changes in the reserve requirement and the macro-prudential measures taken, including the gradual increase in the countercyclical capital buffer rate for the banks' exposures (1% with application from July 2024), will contribute to medium-term price stability and maintenance of the exchange rate stability. Also, the changes in reserve requirement which apply from July 2024, contribute to further support to the monetary policy setup.

The monetary policy decision is based on the estimates for the inflation, which moves within the expectations, as well as on the continuous favorable developments on the foreign exchange market. The annual inflation rate in August significantly slowed down to 2.2%, amid favorable movements in all three main components, i.e. fall in the prices of the food and energy component and slower growth of core inflation. Given the 2023 base effect (measures for temporary limitation on the price growth), the inflation rate is expected to fluctuate by the end of the year, but on average for the entire 2024 it is expected to be within the forecasts of 3.5%, according to the April forecasting round.  The EC's surveys of consumers' expectations show that the expectations for price reduction in the next period prevail for five months in a row. Regarding the stock prices of primary commodities, the latest forecasts have been revised downwards, in line with the increased supply and the reduced demand, which is associated with the weaker growth prospects.

The foreign exchange market is stable and the movements are favorable. The level of foreign reserves at the end of August was Euro 4,469.8 million, which is an appropriate level for maintaining the stability of the exchange rate of the domestic currency. In line with the favorable developments on the foreign exchange market, the National Bank from the beginning of the year intervened with net purchase of foreign currency, which also contributed to improved performance of the foreign reserves than expected. Regarding the latest available data from the external sector, the trade deficit in July 2024 is in line with the expectations of the April forecasting round. The developments on the currency exchange market as of the end of August are slightly higher than the forecasted net inflows from private transfers. The current account deficit of the balance of payments in the second quarter of 2024 was lower than expected according to the April forecast, amid higher net financial inflows.

Regarding the policy of the European Central Bank (ECB), as a factor that the National Bank also takes into account, at the latest meeting in September for the second time this year it was decided to reduce the interest rate by 0.25 percentage points.

The economic growth in the second quarter of 2024 accelerated and is almost identical to the National Bank forecasts. The real growth of the domestic economy amounted to 2.3% annually (1.2% in the previous quarter), amid further quarterly growth as well. Thus, in the first half of the year, there was a growth of 1.8%, which is close to our forecast of 1.9%. The currently available high frequency data for the third quarter of 2024 are limited. For now, July data show real annual growth of the total trade turnover and industrial output, as opposed to their decline in the previous quarter. Regarding the risks to the growth in the next period, they are still present and are primarily related to the developments in the external environment, but also to the intensity of implementation of domestic infrastructure projects.

In the monetary sector, banks’ deposit potential is solid and currently with prospects for better performance than expected for the third quarter. There are similar performances in the credit growth, which slightly exceeds the forecasts. 

Generally, the latest developments in the key macroeconomic indicators, as well as the perceptions in relation to their future path, created an opportunity to reduce the policy rate. However, the National Bank remains cautious when making further decisions on monetary policy. The risks associated with the external environment should further be monitored, primarily the prices of primary products, which are still influenced by the unstable geopolitical context and climate changes, and one should pay attention to the risks from the domestic factors that can affect the demand and prices in the period ahead, including the wage policy. Hence, the conduct of prudent macroeconomic polices will be our priority in the future as well. The National Bank remains prepared to use all the necessary instruments and to take appropriate measures that will contribute to maintenance of the stability of the exchange rate and the medium-term price stability.