PRESS RELEASE
Governor Sejko: Statement to the Press Conference on the Monetary Policy Decision of the Supervisory Council, 6 July 2016

In today's meeting, the Supervisory Council of the Bank of Albania reviewed the monetary policy intermediate report. In conclusion to the analytical information and forecasts presented, the Supervisory Council decided to keep the key interest rate unchanged, at 1.25%.

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The new available data show that the Albanian economy and its monetary indicators have developed in line with our expectations. In line with these forecasts, economic activity and inflation have increased.

The balance of available information suggests that the Albanian economy grew over the first half of 2016, supported by the expansion of private consumption and investments. The worsened external trade balance and the budget surplus, created over the first half of year, acted on the opposite direction.

The expanded private consumption reflects the increase in employment and disposable income, and is supported by the accommodative monetary policy, the adequate financing conditions and the increase in consumer credit. The positive contribution of investments reflects the expanded private investments, both domestic and foreign investments, while public investments were down. The expansion of private investments benefited from the ample liquidity and the low interest rates in the financial markets. The Bank of Albania expects an increase in the private domestic demand even during the second half of year. However, business and consumer confidence remains volatile, thus showing the still unconsolidated position of the private domestic demand as a driver of economic growth.

In parallel, the weak economic performance of our trading partners, the fall of prices for some of our traditional export products, and the high bill of import of some of the foreign direct investments in Albania, led to the expansion of the trade deficit by 26.3%, over the first five months of the year. The Bank of Albania deems that a similar picture will persist in the second half of year, and the external trade exchanges will not support economic growth during 2016.

The surplus of the public sector's financial activity amounted ALL 18.2 billion as at end of May 2016, compared to a deficit of ALL 10.6 billion in the same period of the previous year. This strong fiscal consolidation reflected the growth of revenues and the contraction in budget expenditures. In particular, the latter reflected the reduction of capital spending, remaining below the respective planned level. In line with the budget projections, we expect the pace of public expenditure to accelerate and the fiscal consolidation to slowdown during the second half of the year. Nevertheless, the Bank of Albania re-emphasises that a more even allocation of budget expenditure would help to decrease the fluctuations of the economic activity and financial markets.

In response to the accommodative monetary policy stance of the Bank of Albania, financial markets continue to be characterised by ample liquidity and downward trend of interest rates. The latest monetary stimulus is transmitted also to the financial market, where the interest rates of lek credit fell by around 1.0 percentage point, while the yield curve of government securities has shifted downwards, on average by 1.20 percentage points. The performance of deposits and liabilities in the banking system's balance sheet is stable. Nonetheless, lending remains sluggish. Cleaned up from the effect of non-performing loans write off, credit to the private sector recorded 2.5% annual growth in April. The recovery of banking credit remains a precondition for steady and long-term growth, and will be one of the medium-term objectives of the Bank of Albania and of other public authorities.

Annual inflation stood at 0.7% in May, being in the direction and at the intensity expected by the Bank of Albania. The improvement of economic activity drove to the increase of core inflation, while the decrease of supply-side shocks effects was accompanied by the decrease of disinflationary pressures imported from the external markets.

The new information and the update of forecasts have not changed our outlook for the future. The economic growth projection for 2016 remains unchanged, whereas short term inflation forecasts have shifted slightly upwards and medium term inflation projections have not changed. In conjunction with these forecasts, the Bank of Albania expects a progressive improvement of economic activity in the medium term. These improvements will contribute to the gradual increase of inflation and its return to target by the end of 2018.

The effects of the accommodative monetary policy continue to be transmitted to the financial markets and the current monetary policy stance is assessed as adequate for meeting our objectives.

In accordance with these conclusions, the Supervisory Council decided to leave the key interest rate unchanged at 1.25%. The Supervisory Council estimates that in the absence of unpredicted shocks, the monetary stimulus will not weaken throughout 2016. In addition, the Supervisory Council decided to not alter the interest rate corridor in the interbank market, at 0.25% for the overnight deposit interest rate and at 2.25% for the overnight lending rate.

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At the conclusion of the analysis, the Bank of Albania evaluates that the risk balance on the expected medium-term developments continues to trend down. In particular, the Bank of Albania is attentively following the Brexit phenomenon and the consequences it may have for the Albanian economy.

Our analysis shows that the Albanian economy and financial system are immune to the direct shocks that may come from the expected exit of the United Kingdom from the European Union. Our trade exposure to the United Kingdom, in the form of imports and exports is almost negligible. Also, direct or financial investments originating from the United Kingdom in Albania are low, while remittances account for a little higher than 10% of total remittances. In parallel, the Albanian banking system has a low exposure to the most extreme fluctuations of the British pound and British financial system.

On the other hand, Albania has a higher exposure to possible indirect shocks that Brexit may have on the European economy and financial system. The latter are our main economic and trading partners. Any negative reaction of them would be transmitted to Albania as well.

Related to these indirect effects, the Bank of Albania emphasises that:

• First, the materialisation probability of the extreme shocks is relatively low. We are confident that the stakeholders included in discussions will know to avoid unpleasant situations to everyone. Nevertheless, we are continuously monitoring the situation.
• Second , the Albanian economy and financial system appear to be more prepared to weather possible shocks, compared to similar previous situations. We will continue to work aiming to increase their readiness and immunity.
• Third, in the event of a further worsening of the situation, the Bank of Albania has the will and the right instruments to guarantee the accomplishment of its price stability objective and to support the activity and soundness of the financial system. In particular, the monetary policy would undertake a stronger stimulating nature, by initially using the remained space for conventional instruments, and further addressing, if necessary, non-conventional monetary policy instruments.

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At the conclusion of this press release, the Supervisory Council reconfirms the message that, in the absence of negative shocks, the medium-term development perspective of Albania remains positive.