PRESS CONFERENCE
Meeting of the Supervisory Council of the Bank of Albania, 29 May 2013

Today, on 29 May 2013, the Supervisory Council of the Bank of Albania reviewed and approved the monthly Monetary Policy Report. Based on the most recent analysis of monetary and economic developments in Albania, and following the discussions on their outlook, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged, at 3.75%. The Supervisory Council deems that the monetary conditions are adequate to ensure the inflation target is met in the medium term, providing, at the same time, the required monetary stimulus to boost domestic demand.

Let me now proceed with an overview of the economic developments and key issues discussed at today's meeting.

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The latest economic and monetary data reveal that inflationary pressures remain weak. In April, Annual inflation was 2.3%, slightly down from a month earlier. This trend owed mostly to the downward oil price and lower rental prices.  Against the background of low inflation, the inflation profile continues to be determined by the performance of food prices, which contributed to the formation of about 95% of the annual inflation in April.

Prices of other goods and services of the CPI basket remained around the levels recorded in earlier months.

From the macroeconomic perspective, the domestic and external inflationary pressures have been either weak or downward, whereas inflation expectations are anchored to the Bank of Albania's target. The Albanian economy continues to be characterised by spare capacities of production factors. This landscape is accompanied by the significant reduction of headline inflation during the first four months of the year, hence reflecting the low pressures for increase in production costs, profit margins and final product prices. Furthermore, global market prices decelerated their rise, whereas the stable exchange rate did not support higher imported consumer prices.

The latest information suggests that the weakness of economic activity has been carried over to the first months of 2013. In balance, available data point to a slow performance of consumption and private investments. Albanian households continue to be reluctant to spend, due to the uncertainties for the stability of their funding sources and deceleration of disposable income growth rates. Because of the contagion effect, the weak aggregate demand, businesses' uncertainties about the future and tightened crediting conditions have not encouraged new private investments. On the other hand, economic growth in the first months of the year has relied mainly on foreign demand and public sector demand.

The fiscal policy has been stimulating in the first four months of the year, reflected in the annual expansion of the budget deficit and public spending during this period. Fiscal expenditure's annual increase was 9.8%, mainly due to the rapid increase of capital expenditure, whereas current expenditure maintained the low annual increase rates. On the other hand, fiscal revenues increased at the minimum rate of 0.3%, reflecting the slow economic activity. This performance of budget expenditure and revenue is materialised in the budget deficit that is two times higher than in the first four months of a year earlier. The Bank of Albania notes that the medium and long-term fiscal policy should be more oriented toward maintaining the public debt stability. Achieving this objective helps curb the uncertainty and subdue risk premiums. The low and contained public debt improves the environment for the private initiative, by maintaining low interest rates and increasing available funds, thus contributing to Albania's sustainable and long-term growth.

Trade exchanges with our partners have provided a positive stimulus to economic activity increase during the first quarter. Trade deficit narrowed 28.6% in annual terms during this period, reflecting the good performance of exports and downward imports. Exports expanded 17.2%, in annual terms, during the first three months, dominated by energy-sector exports. Imports continued their annual decline, down by 11.1% during the period.

A more detailed analysis of exports finds that they are highly concentrated in the segment of natural resources. The Bank of Albania deems that higher competitiveness of our products and services, and the expanded export base, are the best instrument to ensure a healthy adjustment in the current account. This objective requires that structural reforms continue with regard to both the goods market and factors of production.

Performance of monetary indicators attests to low monetary inflation pressures on the economy. Annual growth of money supply continued to slow down, descending to 4.6% as at end-March. The economic agents' low demand for money is reflected in a poor credit performance. Annual credit growth as at end-March stood at 1.2%. The slow performance of credit reflects the prudent crediting policy applied by banks and their reluctance to take risks, besides the demand-side factors. This conservative behaviour of banks is also conditioned by the developments in the European arena and tightened supervisory and regulatory policies applied in home countries. Given the current situation of the European banking system, the Bank of Albania deems that it may continue to be present in the Albanian economy in the medium run.

The financial market has been characterised by low liquidity and inflation pressures, thus enabling a better transmission of the monetary stimulus to the economy. Interbank rates have followed the key interest rate cut and continue to be anchored around it.

Moreover, in April and May, the primary market yields were downward, in line with the easing cycle of the monetary policy. The interest rates in the deposit and credit markets reacted more slowly, in accordance with the time lag in the monetary policy transmission mechanism. The pass through of the easing monetary policy to the credit interest rates was also affected by high risk premiums that accompany crediting.

Returning to economic developments, the economic outlook for the period ahead remains similar to that of a month earlier. Economic activity in Albania is expected to grow at low positive rates, close to last years' figures. Foreign demand and fiscal policy are expected to provide positive stimulus to economic growth. Consumption and private investments will have a weak performance during this year. The below-potential economic growth will continue to condition low pressures on consumer prices. In the absence of unforeseen supply-side shocks, annual inflation is expected to remain close to the actual levels in the current year.

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At the end of discussions, the Supervisory Council decided to keep the key interest rate unchanged, at 3.75%. The Supervisory Council deems that the actual monetary conditions are adequate to comply with the medium-term inflation target. The earlier cuts of the key interest rate are being gradually translated into lower lending rates for the public and private sectors, hence providing the premises for a faster growth of aggregate demand.

Similarly, the easing of several supervisory and regulatory requirements in March is stimulating crediting by the banking system.

Expected economic and financial developments require that the easing monetary conditions continue over the policy-relevant horizon.  The Bank of Albania remains heedful and stands ready to respond duly and timely to create appropriate monetary conditions for meeting its inflation target.