Skopje, 21 June 2023

The policy rate and the interest rates on deposit facilities increased by 0.25 percentage points

On 20 June 2023, 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 setup. 

At its meeting, the Committee decided to increase the CB bill interest rate by additional 0.25 percentage points to the level of 6%. At its meeting, the Committee also decided to increase the deposit facility interest rates, by 0.25 percentage points, whereby the interest rates on overnight and 7-day deposit facilities will equal 3.90% and 3.95%, respectively. The supply of CB bills at the regular auction remains unchanged and amounts to Denar 10 billion.

The latest change is a continuation of the monetary policy tightening which started from the end of 2021, primarily with active liquidity management through the interventions on the foreign exchange market, and then, since April last year, with the increase of CB bill interest rate, as well as interest rates on other monetary instruments. Such monetary setup is supported and strengthened by several changes in the reserve requirement, aimed at increasing savings in denars, as well as by systemic and macroprudential measures, such as the introduction of a countercyclical capital buffer and thresholds for borrower-based monitoring, which further strengthens the banking system resilience.

Shifts in the past period in the segments relevant to the monetary policy are mainly in line with the expectations, but the risks are still present. Therefore, further caution is needed when conducting policies in order to stabilize inflation and inflation expectations on a permanent basis. Namely, in line with the expectations, in May 2023, the annual inflation rate continues to slow down, and a slowdown was also registered in core inflation, which reduced to a one-digit level in May. However, inflation remains high and above the historical average, while core inflation which is still high points to the fact that the transmission effects of the energy and food prices have not yet been fully exhausted. Expectations for the future dynamics of the prices of primary products in markets are falling rapidly, but remain accompanied by uncertainty. Foreign exchange market developments are favorable, and the currency exchange market registers higher inflows. In such circumstances, the National Bank is present on the foreign exchange market by purchasing the excess foreign currency liquidity.

To stabilize inflation and inflation expectations on a permanent basis, the leading central banks continue to tighten the monetary policy, but the intensity is more moderate. Namely, in terms of the foreign interest rate, at the meeting in June, the ECB made a decision to increase the policy rates by additional 0.25 percentage points, in accordance with the prospects for maintaining inflation at a higher level for a longer period than expected.

Regarding the latest indicators, in domestic prices, in May 2023 the annual inflation rate continues to slow down, reducing to 11.3% (13% in the previous month), in accordance with the estimates for a slowdown in the inflation rate within the April forecasting round. The slowdown in the annual inflation rate is conditioned by the slower growth of the prices in all three components. The revisions in terms of the expected movements in the external input assumptions about the inflation forecast are mainly in a downward direction. However, the high uncertainty is still pronounced in the movement of world prices of primary products in the following period, amid uncertain economic effects of the war in Ukraine.

In accordance with the international standards, the level of foreign reserves at the end of May is appropriate for maintaining the stability of the exchange rate of the domestic currency. The developments on the domestic foreign exchange market also during May were favorable, whereby the National Bank intervened by purchasing foreign currency on the foreign exchange market. Regarding the latest available data from the external sector, the movements remain favorable, i.e. the trade deficit is currently lower than expected for the second quarter of 2023 according to the April forecast. The developments on the currency exchange market are also favorable, which since the beginning of the year, as of May, point to the possibility for higher net inflows in private transfers than forecasted. 

As for the domestic economic activity, in the first quarter of 2023, the real GDP growth accelerated, reaching 2.1% on an annual basis (after the growth of 0.6% in the previous quarter), at a slightly stronger pace than the forecasted acceleration in the growth for this quarter of the April forecasting round. The currently available high frequency data for the second quarter of 2023 are insufficient to have an overall view of the situation. April data currently show moderate negative developments in industrial production, versus the minimal growth in the previous quarter, as well as real annual fall in total trade turnover, following the growth in the previous quarter.

Regarding the monetary developments, the initial data for May 2023 are currently in line with the forecasts for rapid growth in deposits, and more moderate growth in loans in the second quarter of the year.

In general, inflation, combined with the uncertain and volatile external environment and the existing risks, imposes further precaution from the macroeconomic policy makers and appropriate response in order to anchor inflation expectations and stabilize the inflation on a long-term basis. The National Bank carefully monitors the macroeconomic data and risks and 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 to medium-term price stability.