North Macedonia's central bank (NBRSM) raised the coupon on its bills, which serves as its benchmark interest rate, to 4.25% from 3.50% at the latest 28-day bill auction on Nov 16, according to an official press release. The latest benchmark interest rate hike came after the central bank raised the key rate by 0.50pps to 3.50% in October from 3.00% in September. The central bank had previously raised its benchmark interest rate by 0.25pps in April, May and June and by 0.50pps in July and September from 1.25% in March. The central bank sold some MKD 8.96bn worth of 28-day bills on Nov 16, which was below its MKD 10bn target as demand for the issue stood at MKD 8.96bn.
The central bank also raised the mandatory reserve ratios of banks to further stimulate savings in the local currency. It raised the mandatory reserve ratio of banks for liabilities in foreign currency by 1pp to 19% from 18%. The share of the mandatory reserves in foreign currency that the banks have to fill with EUR was also raised to 77% from 75%. The central bank expects those measures to catalyse the changes in the banks' interest rate policy and prompt the banks to offer more favourable interest rates on all categories of local currency-denominated deposits. The central bank also expects those policy changes to strengthen the growth in savings in the local currency and optimise liquidity management in the banking sector. It also decided on Nov 16 to raise the interest rate on overnight deposits by 0.75pps to 2.15%, the interest rate on seven-day deposits by 0.75pps to 2.15% and the interest rate on overnight loans by 0.75pps to 4.75% to further encourage savings in the local currency.
The central bank said that the monetary policy tightening has been conducted through a wider range of monetary policy tools to ensure the stability of the exchange rate of the local currency and the price stability over the medium term. The central bank explained that it has actively managed liquidity since last year through interventions on the foreign exchange market and other instruments. It noted that its monetary policy this year has been marked by the benchmark interest rate hikes, the hikes of the rates on overnight deposits and seven-day deposits and the changes in the reserve requirement that aim to reduce the Euroization in the banking system. The central bank also said that it has resorted to systemic measures this year, such as the introduction of a countercyclical protective layer of the capital of 0.5%, to strengthen the protective mechanism of the banking system.
The central bank described its latest benchmark interest rate hike as a reaction to the accelerating CPI inflation. It explained that the monetary response was necessary because of the spillover effects from the elevated food and energy prices and the rise in inflation expectations. The central bank also said that the monetary policy has no direct influence on the imported price pressures stemming from global food and energy prices on the domestic CPI inflation. It added that changes in the monetary stance of the European Central Bank (ECB) also influence the decisions of the NBRSM as the local currency (MKD) is tied to the EUR.
The central bank said that the CPI inflation accelerated to 19.8% y/y in October, mainly on the back of higher food prices, and that the average CPI inflation in Jan-Oct stood at 13.2% y/y. The central bank said that most inflationary pressures are coming from external factors on the supply side, especially the increasing import prices of food and energy, which accounted for 75% to the CPI inflation in Jan-Oct. It explained that the higher import prices of food and energy have fuelled inflation expectations, which also reflect the uncertainties related to the movements of prices of primary products on the global stock exchanges. The central bank said that the uncertainties related to prices of energy products stem mainly from the military developments in Ukraine and the sanctions against Russia. Thus, the central bank called for prudent domestic policies and careful management of domestic demand. It added that the risks to its CPI inflation forecasts are on the upside.
The central bank said that the domestic foreign exchange market remains stable, despite the moderate pressures related to the energy crisis and the inflow of foreign currency in the market. The central bank noted that it intervened in October to purchase foreign currency on the foreign exchange market. It also said that the foreign exchange reserves have increased since July and remain in line with the international standards. It assured that the foreign exchange reserves remain in the safe zone, which guarantees the stability of the exchange rate peg of the MKD against the EUR. Regarding the external sector developments, the central bank noted that the improving expatriate remittances have partly offset the pressure coming from the energy crisis on the external trade deficit.
The central bank also said that the economy grew by 2.6% y/y in H1. However, the central bank said that the available high-frequency data for Q3 points towards an economic slowdown. It explained that retail and wholesale trade slowed in Q3, the industrial output declined in the quarter and construction activity deteriorated. It added that the downward revisions in foreign demand due to the negative effects from the war in Ukraine and the deepening energy crisis have dampened the near-term outlook and underlined the downside risks to economic growth. Regarding the monetary sector, the central bank said the growth in deposits has exceeded the growth in bank lending, according to the latest data. It added that the trend is likely to continue in the coming period.
The central bank concluded that the unfavourable external environment and the management of the increasing risks require very cautious domestic policies. The central bank added that it will closely monitor the macroeconomic trends and potential risks. It expressed readiness to take appropriate action through all of its available instruments to maintain price stability over the medium term, stabilise the inflationary expectations and keep the stability of the exchange rate of the local currency.