The National Bank continues to tighten monetary policy: interest rates increased by additional 0.25 percentage points

Skopje, 22 March 2023

On 21 March 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 interest rate on CB bills by 0.25 percentage points to the level of 5.50%. 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 3.40% and 3.45%, respectively. The supply of CB bills at the regular auction remains unchanged and amounts to Denar 10 billion. With these changes, the National Bank continues to tighten monetary policy, which started since the end of 2021, by actively managing liquidity through the interventions on the foreign exchange market, and from April onwards by increasing interest rates. Such monetary setup is supported and strengthened by the several changes in the reserve requirement, aimed at increasing savings in denars, as well as by systemic measures, such as the introduction of a countercyclical capital buffer which further strengthens the resilience of the banking system.

Shifts in the past period in the segments relevant to the monetary policy are in line with the expectations, but the risks persist. The annual inflation rate slowed down also in February 2023, for the fourth consecutive month. At the same time, the surveys of the European Commission, from November onwards, show consumers' expectations for some reduction in inflation in the next twelve months. Core inflation also slowed down, but it remained at a higher level. Also, despite the downward path, the expectations for the future dynamics of the prices of primary products in markets are still accompanied by great uncertainty. The foreign exchange market developments are stable, given the improvement in all segments, including in the corporate sector. However, the uncertainty about the future flows persists, and the environment for conducting monetary policy is further complicated by the latest developments in the USA and Europe related to the problems in the financial area. For these reasons, there is a need for prudent policy conduct in order to stabilize inflation and inflation expectations on a permanent basis. In terms of the foreign interest rate, as an important external factor for the conduct of the domestic monetary policy, at its meeting in March, the ECB, according to the announcement, made a decision to increase the policy rates in accordance with the prospects for maintaining inflation at a higher level for a longer period of time than previously expected. 

Regarding the latest indicators, the growth in domestic prices further slowed down in line with the expectations and reduced to 16.7% in February 2023 (17.1% in January). The slowdown in the annual inflation rate is conditioned by the slower growth of the prices in the energy and core component of inflation, with certain stabilization in the food component. The revisions in terms of the expected movements in the external input assumptions about the inflation forecast are in different directions, whereby the risks with respect to the forecasted inflation rate for 2023 are mainly balanced. 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 February is appropriate for maintaining the stability of the domestic currency exchange rate. The developments on the domestic foreign exchange market also during February were predominantly stable, whereby the National Bank was only occasionally present on the foreign exchange market. Regarding the latest available data from the external sector, the trade deficit in January 2023 is currently slightly lower than expected for the first quarter of the year, but the assessment period is too short to draw more precise conclusions. The latest developments on the currency exchange market, as of February, are favorable and are currently in line with the forecasted net inflows from private transfers for the first quarter of 2023. The performance in the balance of payments for the fourth quarter of 2022 points to lower current account deficit relative to the October forecast, amid higher net financial inflows than expected, which led to higher growth in foreign reserves than forecasted.

As for the domestic economic activity, in the fourth quarter of 2022, the real GDP growth, as expected, slowed down, whereby on average, for the entire 2022, the economy registered a real growth of 2.1%, which is very close to the expectations in the October forecast. The currently available high frequency data for the first quarter of 2023 are insufficient to have an overall view of the situation. For the time being, January data show a solid real annual growth of total trade turnover, despite the small decline in the previous quarter, as well as more moderate negative developments in industrial output.

Regarding the monetary developments, as of February 2023, the annual growth of credit activity continued to slow down and reduced to 7.7%, which is mainly within the expected slowdown. Household loans further slowed down, whereby the annual growth rate in February was 7.2%. At the same time, the growth in deposits accelerated and reached 5.9%, which slightly exceeds the expectations. 

Overall, the uncertain and volatile external environment and the pronounced risks require further precaution from macroeconomic policy makers. 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.