PRESS RELEASE
Governor Sejko: Statement to the Press Conference on the Monetary Policy Decision of the Supervisory Council of the Bank of Albania 5 July 2017

The new economic and financial information, analysed in the Interim Monetary Policy Report, suggests that the Albanian economy continued on the positive development track. Economic activity continued upward, medium-term inflationary pressures are in line with the target, financial markets appear calm, and interest rates and financing conditions are consistent with the achievement of our target.

Economic growth for the first quarter resulted higher than our expectations, whereas inflation for April and May was somewhat lower.

The updating of our forecasts has not led to any significant changes in the expected developments, both in the short and the medium term. In the absence of shocks, the positive trend of the economy, the favourable financing conditions and gradual improvement of confidence and of the external environment are expected to enable the return of the economy to equilibrium and of inflation to target within 2018.

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Annual inflation recorded 1.9% in April and 2.0% in May, being downward from the first quarter. The volatility in inflation rates reflected the lower contribution by food inflation, in response to higher agricultural production, and lower contribution by imported inflation, reflecting the appreciation of the exchange rate. The effect from these supply-side factors is assessed to be transitional.

The performance of the economic and financial environment is consistent with the rise of inflation towards our target in the medium term. Inflation pressures are upward, supported by the expansion of economic activity and increase in the utilisation of production capacities, the rise in foreign prices, and the gradual convergence of medium-term inflation expectations toward the target.

The update of economic analysis with new statistics show that the Albanian economy continued to grow in the first half of the year. Economic growth hit 3.94% in the first quarter, while available data suggest a slowdown in the second quarter. One of the pertinent factors is the uncertainty surrounding pre-election situations. Furthermore, in recent months, an additional uncertainty is due to adverse weather conditions, whose effects may appear in certain production sectors. The effects from these uncertainties are expected to be temporary.

Economic growth was driven by favourable domestic financing conditions and the improved external economic environment. The expansion of consumption and investments benefited also from the continuous improvement of the labour market, confidence pick up, and rise in foreign direct investments. In parallel to private demand growth, a positive effect on the recovery of economic activity is provided by the public sector and the improved trade balance with abroad. The latter is reflected in the rapid narrowing of the current deficit, by 20% in annual terms, supporting also the strengthening of the exchange rate.

The fiscal policy has pursued a consolidation path, reflected in a positive budget balance. Fiscal consolidation, however, has been less intensive than in the previous year, producing a positive stimulus to the economy in the first half of the year. At the end of the first five months of the year, the budget balance resulted in ALL 6.3 billion surplus, reflecting the annual increase by 7.3% in public revenues and by 16.4% in budget expenditure.

The accommodative monetary policy has contributed to reducing financing costs for economic agents. The pass-through of the monetary stimulus to the financial market is reflected in lower interest rates on both deposits and loans. On the other hand, the yields on government securities in the primary market showed a slight increase, mainly generated by the temporary imbalances of their demand and supply. Yet, the volatility in T-bill yields has not been transmitted to other segments of the financial market.

The monetary accommodation has contributed to the growth in the loan portfolio. The volume of lek loans expanded 9% in annual terms, offsetting the contraction of the foreign currency loans. The uptrend in lek loans remains a welcomed development, but the distribution of this growth shows it is concentrated in the households segment, whereas loans to enterprises remain sluggish. Meanwhile, cleaned from the write off effects, the annual growth of the total loan portfolio in April remained modest, at 3%. The Bank of Albania expects lending activity to improve gradually in the quarters ahead, reflecting the expected expansion of demand and improvement of supply. The conditions of the banks credit supply are expected to ease, helped by the measures taken for reducing non-performing loans and supporting healthy credit. The non-performing loans ratio fell to 15.9% in May, from 18.2% in December 2016.

The updating of our macroeconomic projections has confirmed our previous expectations for economic and monetary developments in the medium term. The factual slowdown of inflation in the second quarter does not create any significant divergence in the expected inflation trajectory. The return of the economy to potential and the gradual absorption of unutilised capacities are expected to be associated with the strengthening of inflationary pressures. Inflation is expected to return to our target within 2018. On the other hand, the balance of risks surrounding these projections is assessed to have shifted on the down side, driven by uncertainties both in the domestic and the external environment.

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In accordance with these conclusions, the Supervisory Council judges that the current monetary policy stance is adequate.

On this basis, the Supervisory Council decided to keep the policy rate unchanged, at 1.25%.

In addition, the Supervisory Council decided to keep the interest rates on overnight deposit and overnight credit facilities, unchanged at 0.25% and 2.25%, respectively.

Judging on the available information, the Supervisory Council deems that the monetary policy will remain accommodative and the intensity of the monetary stimulus will not be reduced before the first quarter of 2018.