PRESS RELEASE
Governor Sejko: Statement to the Press Conference on Monetary Policy Decision, 28 March 2019

Dear media representatives,

Today, 28 March 2019, the Supervisory Council of the Bank of Albania reviewed and approved the Intermediate Monetary Policy Report.

The new data, obtained over the last two months, is overall in line with our forecasts. Also, our expectations for the outlook have not changed significantly, though risks in the both domestic and external environments have increased.

Against this backdrop, the Supervisory Council deems that the actual monetary policy stance remains adequate to accomplish our objectives. The monetary stimulus, passed through the low interest rates and the forward guidance on the monetary policy, remains necessary to foster economic growth and for the return of inflation to target.

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The external environment shows a slowdown of the growth pace and reduction of the current and expected inflation rate, both in the European and global context.  Major central banks, in response to these developments, have revised the monetary policy stance, towards further easing or postponing its normalisation.  On the other hand, international financial markets appear relatively calm.

In line with our expectations, inflation in Albania trended down during the first two months of 2019.  Average inflation in this period stood at 1.8%, reflecting a fuller transmission of the decelerating effect of the exchange rate appreciation. Our assessments show this effect will peak in the first half of 2019, and will gradually diminish during the following quarters.

 

In parallel with this effect, domestic inflationary pressures appear to be still insufficient for the return of inflation to our target. Although the continuing expansion of aggregate demand has driven employment and wages upward, production costs and profit margins are yet insufficient to meet our inflation target.

According to the available indirect data, the pace of economic growth may have slowed down somewhat in the two last quarters. To a large extent, this slowdown is due to the performance of electricity production, and as such it is assessed to not affect the medium-term trends of growth.

On the other hand, the medium and long-term determining factors of both aggregate demand and economic growth appear more stable.  Also, according to available indirect data, consumption and private investments continued to increase during this period, reflecting the improvement in disposable income and balance sheets, the increase of the capacity utilisation rate and the favourable financing conditions.  Albanian exports of goods grew in 2018 Q4, but slowed down in the first two months of 2019. This slowdown reflected the base effect of high exports in electrical energy during the same period in the previous year, and the unfavourable international conjuncture for some categories of Albanian exports. Lastly, fiscal policy has maintained its consolidating trend during the first two months of 2019.

Both monetary stimulus and fiscal consolidation have provided a favourable financial environment to stimulate demand.

As a response, interest rates and financing costs for the public sector appear close to their historical minimum levels.  Also, the exchange rate appears relatively stable, reflecting the better balance of the foreign currency demand and supply. 

Economic growth is underpinned by - and reflected in - the gradual upward trend of credit to the private sector. Excluding the exchange rate accounting effect and the one arising from the non-performing loans write off from banks’ balance sheets, credit to the private sector recorded around 6% annual growth, in the first two months of 2019. Although moderate, this growth is a positive signal for the recovery of demand and the improvement of supply for credit.

The on-going consolidation of the banking sector and the continuous improvement of its balance sheets set up the preconditions for a faster improvement of the supply and pace of lending in Albania. The continuous falling trend of non-performing loans ratio shows that credit risk in Albania has been considerably reduced. The Bank of Albania considers that these positive premises should be more strictly reflected in credit policies and standards applied by the banking sector.

Judging on the current development trends, and their determining factors, the Bank of Albania deems that aggregate demand will trend upward during the medium-term horizon. The increase of demand for goods and services will further expand employment, drive wages and profit margins up and gradually strengthen domestic inflationary pressures. In parallel with the complete fading out of the exchange rate effect, these developments will enable the convergence of inflation to target within 2020.

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The Supervisory Council deems that maintaining the accommodative monetary policy stance is a key precondition for the realisation of this projection. Taking into account these circumstances, the Supervisory Council decided to:

- Keep the policy rate unchanged, at 1.0%;

- Keep the overnight deposit and overnight lending rates, unchanged at 0.1% and 1.9%, respectively.

In parallel with the re-confirmation of the baseline scenario of expectations, the Supervisory Council considers that downside risks have strengthened during 2019.  The deterioration in the external environment, the political tensions in Albania, and the concurring improvement pace of both supply and demand for credit, are factors which may tilt economic developments to the down side of the baseline scenario expectations.

The monetary policy will remain accommodative in the medium-term horizon, although the intensity of the stimulus will be adjusted to the pace and the stability of economic activity improvement. In particular, the Supervisory Council assesses that the materialisation of risk factors may require postponing the monetary policy normalisation.