Publication Date 31.08.2010
At its meeting of 31 August 2010, the Supervisory Council of the Bank of Albania analyzed and approved the monthly Monetary Policy Report. After considering all the information available for the latest economic and financial developments at home and their future outlook, at the end of discussions, the Supervisory Council of the Bank of Albania decided to leave the key interest rate unchanged at 5.00%.
The available data about the global economy confirms the progressive recovery in the economic activity. The stimulating monetary and fiscal policies have affected the increase of the demand for goods and services and the expansion of the trade activity. Survey results and future forecast suggest further improvement of economic indicators, signalling that the global economy will continue to strengthen. The inflationary pressures at a global level remain contained and central banks’ interest rates continue to hit record lows. The financial markets featured highly volatile interest rates, financial products prices and trading volumes.
On the one hand, this volatility has reflected the positive signals deriving from the real economy and the encouraging stress-test results of large banks, and on the other hand, the uncertainty arising from the increasing levels of public debt. At a political level, the debate characterising the private and public economic authorities is the definition of the required size and duration of macroeconomic stimulus. The response to the economy’s support dilemma, without prejudice to the risk premium and its long-term balances, will considerably condition the performance of the global economy and Albania’s short and medium-term growth perspectives.
Owing to the recovery of demand, raw material prices continued to manifest an upward trend during the recent months. Wheat prices in particular hit record high in the world markets in August, following the fluctuation of supply and demand ratios and the restriction of exports from one of the main producing countries. Their pass-through on Albania’s headline inflation is expected to be weak, but it will remain subject to monitoring during the months ahead.
The Albanian economy continued to be characterised by the gradual improvement of economic indicators, confirming an increasing activity – but relatively slow. Official statistics reveal positive growth rates in the first quarter of the year, whereas confidence survey results and other indirect data suggest the persistence of these rates in the second quarter as well.
The economic activity at home has been supported by the growth of foreign demand and Albanian exports, whereas domestic demand has recorded slower growth. This performance has been reflected in a sharper increase of industry and services sector, whereas construction and agriculture have provided a low contribution to economic growth. In addition, the Albanian economy suffers non-utilized capacities and low inflationary pressures arising from the domestic demand. The monetary stimulus resulted adequate to accommodate a growing economic activity but without creating excess liquidity. In the presence of anchored inflationary expectations, this economic environment helped absorb the shocks on inflation derived from supply-side factors. Consequently and in line with our expectations, inflation has been waning during 2010. CPI annual inflation pointed to 3.4% in July. This inflation rate owes mainly to the upsurge of administered and basic prices in the international markets, and the depreciation of the domestic currency. These supply-side factors are expected to have a transitional impact on inflation, thus not being translated into stable inflationary pressures.
This dynamic has conditioned and will continue to condition the performance of inflation in the period ahead. In absence of unexpected supply-side shocks, the projections of the Bank of Albania set the annual inflation rate close to the central bank’s 3% target in the medium run.
Private consumption has provided a positive contribution to the economic activity during the second quarter.
This performance is confirmed by the higher growth rate of tax income, which in turn provides an insight into the level consumption in economy, the growth of consumer goods’ import, and the improved consumer confidence indicators. The generally sound financial balances of Albanian households provide a quick response to the improvement of the current climate and the macroeconomic perspective, rise in disposable income, and the decline of uncertainty. On the other hand, the possibility of households to finance their consumption through banking loan results problematic as long as their access into consumer and mortgage loans is dropping.
Private investments are gradually recovering their upward paces, but at markedly lower levels than in the previous periods. The more positive business confidence climate, the increasing support with banking loans, the higher capacity utilisation in economy, and the increase of capital and intermediate goods’ import suggest that the level of private investments has increased during the recent months. Confidence indicators show positive expectations for the third quarter of the year, hence supporting our assessments for the fuelling of aggregate demand from the private sector.
Public sector curbed the fiscal expansion starting from the beginning of the second quarter. At the end of July, budget deficit amounted to ALL 23.1 billion, about 42% lower relative to the previous year. Budget revenues grew by 3.7% y-o-y, whilst expenditures contracted by 5.1%.
Capital expenditures in particular continue to record negative growth rates, being in line with the Ministry of Finance plan on curbing budget expenditures control and reducing public investments for 2010.
Bank of Albania considers that the observance of the deficit and public debt level in the revised budget plan will help preserve the economic balances. The prudential management of public borrowing will generate downward pressures on both the risk premium and the long-term interest rates, thus providing more room to boosting the private sector lending. It will also increase the flexibility of fiscal policy in the medium and long run.
Net exports continued to increase their contribution to aggregate demand during the second quarter of the year. This performance was triggered by the annual growth of exports by 86% against the growth of imports by only 6% during this period. These developments materialised in the further narrowing of the trade deficit by about 14% y-o-y. The reduction of trade deficit was accompanied by lower pressures in the foreign exchange market and a more stable exchange rate.
Bank of Albania considers that the current export growth rates, albeit encouraging, will be difficult to be preserved. Therefore, the long-term stability of Albania’s external position will require a more careful approach to the trade deficit and the encouragement of stable capital inflows.
The slow improvement of domestic demand is reflected in a more stable growth of money supply. This indicator recorded an annual growth of 10.1% in June and continues to be mainly supported by the high contribution of the banking system’s net foreign assets. In the meantime, private sector lending continues to record relatively slow growth rates, reflecting both the performance of demand and the still tight lending terms.
Excluding the exchange rate effect, the annual credit growth in June pointed to 6.4%, from 4.9% in the end of the last quarter. In this period, it was mainly triggered by the increase of credit to businesses, where the loans extended for investment purposes has the highest share.
The annual deposit growth of 15.8% in June improved the liquidity indicators of the banking system’s balance sheet. The augmentation of liquidity in the system, the controlled public sector borrowing in the domestic financial markets, the decrease of risk premium and the anchored inflationary expectations have conditioned the drop of interest rates in the financial markets. The reduction of both deposits and Government securities’ interest rates due to the key interest rate cut in July is expected to create more adequate conditions to encourage the economic activity.
Bank of Albania has implemented a prudential monetary policy. In view of observing the inflation target, the Bank of Albania cut the key interest rate by 0.25 pp in July.
This easing of monetary conditions aims to provide a further stimulus to the economic activity, controlling at the same time the inflationary pressures and the external balances of the economy. It was transmitted into the financial market in its short-term segment, thus leading to the decrease of banks’ borrowing cost, and lower interest rates in the interbank market and the primary market of Government securities. In the forthcoming months, the monetary policy movement should also generate lower private sector borrowing cost. In terms of the operational aspect, we are present in the market by providing all the necessary liquidity in order to ensure a normal banking system functioning.
In its discussions, the Supervisory Council of the Bank of Albania concluded that in absence of unexpected shocks, consumer prices inflation will be in line with the Bank of Albania’s target in the medium-term period. At the end of discussions, the Supervisory Council decided to keep the key interest rate unchanged at 5.00%.
With regard to the future, Bank of Albania remains firmly committed to act by factorising the real and expected performance of economic indicators, in order to maintain price stability and further consolidate the macroeconomic balances at home.