Macedonia's central bank said on May 4 it has raised the key interest rate to 4% from 3.25% due to pressures on the deposit base and higher demand for foreign currency as a result of the unstable political situation in the country.

Macedonia is facing political stalemate with no sign of a quick solution following the start of anti-government protests in mid-April after president Gjorge Ivanov made the shock decision to pardon politicians under criminal investigation. It is not clear whether early general elections scheduled for June 5 will take place, as conditions for free and democratic vote have allegedly not been met.

The decision of the central bank to tighten its monetary policy is a reaction to the increased demand for foreign currency and pressures on banks' deposit base, as a consequence of the worsening expectations caused by the unstable political situation in the country, the central bank said in a statement.

On the other hand, the central bank said it continues to assess Macedonia’s economic fundamentals as healthy, without major imbalances in the economy.

All recent indicators point out to solid economic and lending growth without pressures on prices or the external sector, the central bank said.

The benchmark interest rate, which determines its monetary policy, has been kept at 3.25% since July 2013 when the monetary authority switched to ‘volume tender’ to place the Central Bank (CB) bills and announced a fixed interest rate for the bills and dealers bid only with amounts.

On May 3, the European Commission upgraded its 2016 projection for Macedonia’s GDP growth to 3.5% from the previous forecast of 3.3% saying that domestic demand is expected to boost growth.

The current account deficit remains moderate, with positive spillover effects from structural changes in the export sector and the lack of financial flows for its financing. In addition, foreign exchange reserves are consistently at an adequate level, according to the central bank.

Macedonia has a fixed exchange rate regime, with the central bank pegging the domestic currency, the denar, to the euro.