PRESS CONFERENCE
Speech by Ardian Fullani, Governor of the Bank of Albania at the Press Conference on the Monetary Policy Decision ofBank of Albania’s Supervisory Council, 16 December 2013

Today, on 16 December 2013, Bank of Albania’s Supervisory Council reviewed and approved the monthly Monetary Policy Report. Based on the latest monetary and economic developments in Albania, and following the discussions on their outlook, Bank of Albania’s Supervisory Council decided to cut the key interest rate by 0.25 percentage points, at 3.0%.

The key interest rate cut – subsequent to that of November 2013 - reflects our projections for weak inflationary pressures in the medium term.  Aggregate demand and economic growth are likely to remain below potential, being associated with slow rise in production costs and consumer prices. Also, imported inflation pressures are likely to be weak and downward. Reflecting the expected fiscal adjustment in the current and next year, easing monetary policy aims to support the aggregate demand by improving financing terms and creating proper conditions to meet our medium-term inflation target.

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

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Annual inflation was 1.0% in November, dropping significantly from its rate in October. This drop was driven almost totally by the drop in food price inflation during this month. In a broader context, the food price inflation slowed in the countries of the region during the second half of this year, reflecting the global conjuncture of prices. Prices of other CPI basket goods contributed very slightly to headline inflation, resulting in an insignificant impact.

From the macroeconomic viewpoint, the low inflation rates in the last months of the year reflect the overall downward inflationary pressures on the economy. The poor performance of aggregate demand continues to condition the incomplete productive capacity utilisation in the economy, thus causing a slow increase in production costs of domestically produced goods and services. 

Also, the significantly slower foreign price rise and the stable exchange rate have led to a lower imported inflation. On the other hand, inflation expectations and liquidity situation in the economy convey signals for moderate price rise in the medium term.

Real-economy data on the second half of the year are scarce. The new information gathered during the last weeks supports our previous projections for a low but positive growth of the Albanian economy over this period.  However, some new indicators from the last month signal a slower than expected economic performance.

The external sector of the economy highlights weaker contribution of the foreign demand to aggregate demand growth. The real-term net export deficit expanded in the third quarter of the year, mainly due to weak performance of tourism over this period.

On the other hand, the latest foreign trade data show that the annual nominal trade deficit continued to narrow in October, by 12.2%, mainly due to 17.1% annual export growth, while imports dropped 0.3%.

The public sector's contribution, which supported the demand growth in the first half of the year, diminished in the second half. Fiscal policy was expansionary over the first ten months of the year, focused mainly on the third quarter of the year. Budget spending increased 7.1% from the previous year, mainly due to higher current spending. On the other hand, fiscal revenues dropped 2.7% in annual terms over this period, reflecting the weak economic activity and imports in the country. Despite the slower expenses in the second half of the year and lower drop in revenues, the budget deficit continued to grow. Until October, this deficit was almost twice that of the previous year.

Taking into account the high public debt level, the Bank of Albania deems that the current fiscal trajectories are unsustainable in the medium term. Therefore, we support and welcome the measures for a fast adjustment and fiscal sustainability.

Both important components of domestic demand - private consumption and investments - remain weak due to uncertainties about the future, incomplete capacity utilisation, low consumer confidence and limited financial resources.

Against the backdrop of weak inflationary pressures, the Bank of Albania eased further the monetary policy in November, cutting the key interest rate, at 3.25%. The monetary policy signals were swiftly transmitted to most of financial market segments, helped also by reduced liquidity premiums for them.

The interbank market rates, primary market yields and lek-denominated deposit interest rates continued to trend down, following the key interest rate cut in the economy. Recently, credit interest rates have also dropped but at a slower pace. Their sluggish response and the common time lags in the transmission mechanism reflect primarily the high credit risk premiums and the rather conservative policies imposed by developments in the European financial market. 

Monetary indicators have performed in line with the real-economy developments and highlight weak monetary inflation pressures on the economy. Annual monetary supply growth slowed to 2.3% in October, reflecting the economy's low demand for money. Banks’ reluctance to lend to the economy and the private sector’s weak demand for funding are materialised into lending performance deterioration.

Particularly in October, lending to the economy deepened its annual contraction to 2.2%, reflecting a poor performance across all its segments.

Our baseline projections for the economic outlook remain generally unchanged. Economic growth in the next quarters is expected to be positive but below the productive potential of the economy. Against the backdrop of a weakening net foreign demand and expected public finance consolidation, the economic growth will be heavily determined by the performance of private consumption and investments, which show no recovery sign yet. The continuation of negative output gap will provide weak pressures on medium-term prices, while the supply-side pressures are likely to be subdued. In the absence of unexpected shocks, inflation is expected to range low over the quarters ahead.

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At the end of discussions, Bank of Albania's Supervisory Council decided to cut the key interest rate by 0.25 percentage points, now standing at 3.0%. Our assessments show that the monetary stimulus pass-through to financial markets and the real economy will contribute to gradually bringing inflation back to our 3% target. The Bank of Albania will continue to keep the easing monetary policy stance until meeting the inflation target.