North Macedonia's National Bank outlines path to medium-term inflation target - EXCLUSIVE
CE Report presents an exclusive interview given by a source in the National Bank of the Republic of North Macedonia, highlighting the central bank’s assessment of recent inflation trends, monetary policy measures, and prospects for price stability over the coming year.
What key factors does the National Bank identify as driving inflation stabilization at around 4% by the end of this year?
The expected stabilization of inflation at around 4% by the end of the year reflects the combined effects of several factors. First, the continued easing of external price pressures throughout the year is playing an important role, particularly through lower observed volatility in global energy and food markets and a more favorable import price environment. These developments are especially relevant for a small and open economy such as ours, which is highly dependent on imports. Second, the monetary policy measures implemented by the National Bank over the past period continue to contribute to the disinflation process and to the anchoring of inflation expectations. Our policy stance has remained unchanged since February this year, reflecting our cautious and data-driven approach regarding monetary policy conduct, which carefully takes into account overall economic conditions and prevailing risks. This stance was further supported by recent changes in reserve requirements, tightening of macroprudential measures in terms of credit demand quality criteria, as well as decisions related to systemic risk management. As a result, inflation trends in the past months suggest clear stabilization of price dynamics. At the same time, survey indicators show that inflation expectations of households and companies have stabilized, indicating that there is no longer a perception of continuous price growth. Third, domestic demand pressures remain contained, supported by prudent macroeconomic policies that help limit second-round inflationary effects and contribute to the overall price stabilization. Finally, the exchange rate stability within the long-standing fixed exchange rate regime remains a key nominal anchor, helping to limit imported inflation, anchor inflation expectations and support overall price stability.
Which components of inflation are expected to contribute most to the projected decline to 2.5–3% in 2026, and what risks could slow this process?
Looking ahead, inflation is projected to follow a downward path toward its historical average, with annual price growth moderating to 2.5% in 2026. Further declines in global oil and food prices next year, together with additional easing in foreign effective inflation, are expected to support this trajectory. The stabilization of inflation is also expected to be underpinned by anchored inflation expectations and limited pressures from domestic demand. From a structural perspective, the slowdown in inflation is expected to be driven primarily by the food and core inflation components, while energy prices are projected to continue declining, albeit at a slightly slower pace. However, the pace of the disinflation process remains subject to a number of risks. Externally, renewed volatility in global energy and food prices or unexpected supply disruptions could slow the adjustment, particularly amid ongoing global trade tensions, geopolitical uncertainty, and climate-related developments. On the domestic side, risks are mainly linked to demand-side developments in the economy. The National Bank remains vigilant to these factors and stands ready to calibrate policy accordingly to support the ongoing disinflation process.
How does the National Bank interpret recent months of deflation and small month-to-month changes in prices in terms of overall price stability?
Recent inflation developments point to a clear moderation of price dynamics. Over the past four months, not only has inflation stabilized, but there have also been two instances of monthly price declines by around 0.2%. Such developments are viewed as part of the broader disinflation process in our economy, reflecting the easing of earlier inflationary pressures. They confirm the absence of persistent upward price momentum and indicate that inflation expectations among households and companies remain well-anchored, with no perceptions of persistent price growth. This price dynamics aligns closely with our projections of inflation moderating to around 4% by year-end and gradually returning toward levels compatible with the historical average of about 2%, which is consistent with the goal of achieving price stability over the medium term.
What role will monetary policy instruments play in guiding inflation toward the medium-term target of around 2%?
The National Bank has demonstrated that it has a range of monetary policy instruments at its disposal that are effective in achieving its primary objective of price stability. These include adjustments to the key policy rate, reserve requirements, liquidity management through Central Bank bill auctions and other open market operations, as well as macroprudential measures if there is a need for a targeted response. Given our monetary strategy of maintaining a stable exchange rate of the denar, decisions on whether, and which, instruments to deploy depend on two key factors. The first factor is inflation developments, including core inflation and expectations trends, and the second factor is the foreign exchange market conditions and the level of foreign exchange reserves, which is crucial for maintaining exchange rate stability. The National Bank continuously monitors the movements of these key factors, alongside risks and developments affecting domestic demand, and is prepared to deploy its instruments promptly if necessary to safeguard price and exchange rate stability. In this context, policy instruments will continue to be calibrated flexibly in response to incoming data and evolving risks, ensuring a gradual and orderly adjustment of inflation toward the long-term average of about 2% over the medium term.
How sensitive are the Bank’s inflation projections to external factors such as energy prices, global inflation trends, and regional economic developments?
The Macedonian economy is small, open and import-dependent, making it highly exposed to global and regional developments. As a result, our inflation projections are particularly sensitive to external factors. Energy prices, in particular, exert a significant influence through their direct impact on import costs and pass-through to domestic prices. As seen during the recent energy crisis, these effects can be significant, given that our country is fully dependent on oil imports and our production has a relatively high energy intensity. Global inflation trends and foreign effective inflation, especially from euro area trading partners, also play a key role in affecting our import price environment, particularly under the fixed denar-euro exchange rate regime. At the same time, regional economic dynamics, such as growth in the Western Balkans and especially the euro area, transmits to the Macedonian economy through trade, remittances, FDI and confidence channels, influencing domestic demand pressures and prices, given our high trade and financial integration. While the National Bank’s projections incorporate assumptions regarding these external conditions (prices on world commodity markets, foreign effective demand, foreign effective inflation, etc.), unexpected volatility or external shocks could change the trajectory of the projected inflation. Hence, to address these sensitivities, the Bank prepares alternative scenarios alongside the baseline projections, particularly in periods of heightened uncertainty. These scenarios support better risk management and informed monetary policy decisions, taking into account the complexity and volatility of the external environment. Hence, as part of the latest macroeconomic projections cycle, the National Bank prepared an alternative scenario that incorporates the IMF’s assumptions about the potential effects of permanently higher tariffs, disruptions in global supply chains, tighter financial conditions, and weaker demand for US financial assets, which could materialize in 2026. In this scenario, the aforementioned risks could affect key segments of the Macedonian economy, with corresponding implications for both inflation and domestic growth.
Photo: National Bank of the Republic of North Macedonia
This interview was prepared by Julian Müller
