Publication Date 30.09.2009
The Supervisory Council of the Bank of Albania, at its meeting of September 30, 2009, reviewed the Monetary Policy Monthly Report. After getting acquainted with the latest economic and financial developments at home and at the conclusion of the discussions on their expected future performance, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged at 5.75 percent, which is concurrent with the keeping of inflation close to the Bank of Albania target over the medium-term.
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The analysis of the latest economic and monetary developments has confirmed our expectations for an overall downturn of the economic activity at home, lower domestic inflationary pressures, relaxed monetary markets and slowing recovery of financial intermediation. Moreover, it has underscored the still fragile equilibrium of economic and monetary indicators.
The conclusion of our discussions converged to the decision of keeping the key interest rate unchanged. This decision aims at preserving and firming up the established balances further, considering macroeconomic stability an indispensable precondition for a stable and long-term growth.
Economic activity at home has attested to the improvement of the overall global conditions during the last two months, recovery signs of lending activity and the seasonal effect of the summer season. Global economy is being characterized by a more moderate slowdown of economic activity in advanced economies, accompanied with higher global trade activity and low inflationary pressures at a global level. Despite the insufficient statistical data on the Albanian economy, indirect indicators suggest that it witnessed positive economic growth, although slower compared to the preceding years. The low pace of both retail sales and budget revenue increase, the slower exports, the lower growth of lending to the economy and business and consumer confidence indices show that the Albanian economy is going through slower economic growth relative to the previous year.
This situation is also mirrored in the low inflationary pressures, witnessed by the low core inflation, which is a good measure of domestic demand pressures. Annual inflation marked 2.2 percent in August, remaining within the Bank of Albania target but close to its lower limit. The seasonal tendency of price behaviour maintained the intensity, keeping the inflation rate similar to the previous month. Average annual inflation marked 2.2 percent, similar to the previous year, attesting to the complete termination of the first round effects of the previous year’s increase in raw material and energy prices.
Fiscal policy maintained its expansionary tendency in July although at more moderate paces. Budget revenue stood at the same actualization levels as in the previous months -about 94 percent- while expenditure were met by 98 percent of the projection, maintaining the same level as in the previous three months. This gave rise to higher budget deficit during this period. Higher budget deficit and public expenditure boost the economic activity against a background of low demand in economy; however it is also coupled with higher interest rates on the public debt. The upward revision of public expenditure and budget deficit is projected to maintain this effect for the remaining 2009, while a more balanced fiscal position for 2010 would reduce the pressures on the money markets, by providing more room for the increase of the monetary stimulus.
The external sector data on the second quarter of 2009 reveal a further annual reduction of Albania’s trade exchanges with the rest of the world. According to preliminary data, these development tendencies persisted during July 2009 as well. Exports decreased by 17 percent relative to the same month the previous year. Imports dropped by about 8 percent in annual terms. Trade deficit remains high, giving rise to imbalanced supply and demand for foreign currency in the economy.
Nevertheless, the maintenance of a flexible exchange rate, the correcting tendency of trade deficit and the attractiveness of savings denominated in ALL, in the form of higher interest rates and low inflation, serve to relaxed exchange rate volatility and to a strong position of the ALL in the medium and long-term.
Monetary indicators for July have reflected a more relaxed dynamic of financial intermediation. The performance of the external sector of the economy provided its impact over the negative rates of the money stock foreign currency component. However, the banking system intermediated the growth of ALL lending to the private and public sector at positive paces. While money supply grew at lower annual rates, about 4.4 percent, M2 ALL aggregate maintained high annual growth rates - 9.7 percent in July. The slower foreign currency lending to economy and the lower supply with foreign currency inflows from the external sector have yielded a negative annual growth rate of foreign currency-denominated deposits. Private sector lending grew 15.8 percent in nominal annual terms from 17.9 percent in June. Business credit provided the main contribution to the monthly growth of credit, a constant phenomenon, which this month appeared particularly more pronounced. Credit denominated in ALL maintained the average annual growth rate, about 28-30 percent. However, the slower foreign currency lending has brought about the decline of the credit growth rate.
The Bank of Albania open market operations met the liquidity needs of the banking system. The central bank injected the required liquidity by commercial banks, preserving at the same time an adequate time structure of this injection. Despite the improved liquidity situation, the yield rates in the primary market maintained the recent months’ upward trend. The higher risk perception from banks has determined the long-term yields, leading the 2 and 5-year bond yields to increase. The performance of new EUR and ALL deposit interest rates appeared stable in July. New ALL credit interest rates maintained their decline in July. In the meantime, new EUR credit cost tightened over the same month.
Concluding, forecasting a relaxed and within target inflation for the future, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged. This move is consistent with the prudent monetary policy pursued by the Bank of Albania in 2009. This policy has aimed at transmitting the controlled monetary incentives and keeping the inflationary expectations close to the Bank of Albania target. The latest developments suggest that the inflationary pressures are downward. The higher pass-through of the recent upward raw material prices in the global market may give rise to higher consumer prices in the Albanian economy. The exchange rate, the inflationary expectations and Albania’s fiscal position will continue to condition the risk balance in the future.
The expected relaxation of these developments against a background of stable financial environment will provide enough room for higher monetary incentives in economy.