PRESS RELEASE
Speech by Ardian Fullani, Governor of the Bank of Albania, at the press conference on Bank of Albania’s Supervisory Council decision on monetary policy, 23 March 2011

Today, on 23 March 2011, the Supervisory Council of the Bank of Albania reviewed and approved the monthly Monetary Policy Report. Based on a thorough analysis of Albania's latest economic and monetary developments and discussions on their performance outlook, the Supervisory Council of the Bank of Albania decided to raise the key interest rate by 0.25 percentage point to 5.25 percent.

I would like to proceed with a brief overview of economic developments and main issues discussed at today's meeting of the Supervisory Council.

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The global economy was characterized by clear signs of growth in the first quarter of 2011. Emerging economies continued to lead the global growth, whilst economic expansion in advanced economies remained fragile. The Euro Area economy, the member states of which are our main trading partners, continued to expand over the course of this period. It also continued to experience increased financial tensions and low economic growth in its peripheral countries. The outlook shows further strengthening of the global economy, which will be markedly conditioned by the process of fiscal correction undertaken in several countries and the upward inflation trends.

On the other hand, the global demand recovery, structural supply-side problems and weather disturbances or geopolitical developments in certain regions have led to price rise in raw materials and primary commodities. It has been more pronounced for agricultural and agro-industrial products, bringing their indices back to 2008 historical records. Consequently, inflationary pressures are higher and consumer prices have picked up.

These developments are reflected in the Albanian economy. Driven by the strong impact of climbing prices in the global markets, annual inflation rate edged up to 4.5% in February, signalling a greater pass-through of inflationary pressures into the domestic market. While the upward inflation rate was expected and announced by the Bank of Albania, the speed of its increase was unknown. From the viewpoint of basket composition, inflation rate rise in February derived from an increase in food and energy prices. In particular, processed and unprocessed food inflation has made a 70% contribution to headline inflation, whereas administered price rise has contributed about 0.4%. The impact of food price rise on inflation is more pronounced in emerging economies, such as Albania's, where foodstuffs have a considerable weight in the basket. On the other hand, this considerable weight makes possible the pass-through of such price rise into core inflation rate, which edged up to 3.2% in February, shifting inflationary expectations upward. Other basket items have made a marginal contribution to inflation. However, the contribution of several other items has been upward. 

In the macroeconomic context, inflation rate pickup in February is attributed almost entirely to added inflationary pressures originating from external economy, while domestic inflationary pressures have remained in check. Real economy developments continue to result in unused production capacity for both labour and capital markets, as well as in a still negative output gap.

Concerning assessment of the domestic economy, it should be stressed that our judgement on the real economy performance remains, in general, similar to that of the previous months. Real economy data coverage over the first months of the year remains low; however, indirect available data suggest that positive growth rates are carried on the first quarter of this year as well. Latest data from foreign trade and fiscal sector, have confirmed our expectations for a higher contribution of the domestic demand to economic growth. This contribution owes mostly to increased public spending and budget deficit during the first quarter, reflecting and preceding a more stimulating position of fiscal policy to 2011 aggregate demand.

In quantitative terms, year-over-year budget spending increased by 14% in January, thanks to about 8% growth of current expenditure and 40% growth of capital expenditure. Consumption and private investments have increased at contained rates, providing a lower contribution to domestic demand. Latest data on the externa sector of the economy show a downward contribution of foreign demand to aggregate demand over the fourth quarter of the past year. The deficit of net exports has increased by 2.3%, due to higher import growth over the course of this quarter. Data on foreign trade for January also show the same line. Merchandise exports have maintained high growth rates, up by 53.8% y-o-y, whereas y-o-y increase of imports is 19.3%. These developments have resulted in enlarged trade deficit by about 3.0% y-o-y.

Analysis of monetary developments confirms the so-far assessments for controlled pressures of monetary nature over the medium run. Nominal money supply growth rates decelerated to 11.5%, down about 1 percentage point from December. Banking system deposit growth has remained stable and liquidity condition has improved.
On the other hand, regardless of recovery signs highlighted recently, the growth of lending to the economy is decelerating. Year-over-year credit growth marked 9.8% in January, reflecting simultaneously the moderate demand for loan and its seasonal behaviour over the first months of the year. Information obtained from financial markets also attests to low liquidity risk premium. Interbank market interest rates have approached to key interest rate and have exhibited a low volatility. Primary market yields have increased slightly, reflecting the fiscal sector's higher demand for funding and hence offsetting a part of the sharp decline they had exhibited last two months of 2010. Foreign exchange market has also calmed down and exchange rate performance is characterized by a very low year-over-year depreciation.

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Further in the meeting, the Bank of Albania's Supervisory Council proceeded with discussions on the actual and expected inflation rate. In the Council's opinion, rapid rise in February's inflation rate suggests that imported inflation pressures appear higher than expected and their effect is being passed-through fully.

Inflationary pressures are generally of foreign origin and have the nature of supply-side shocks. However, the importing size of external inflationary pressures and their rapid pass-through into consumer prices at home indicates the increased ability of traders and businesses to dictate the final prices to the economy. This development might have been helped by recovery of the domestic demand. It may also reveal a shift upward of inflationary expectations in the economy or likely second round effects, given the expanded base of items contributing to inflation.

Taking into consideration the information summarised above, the Supervisory Council deemed that inflationary pressures for the medium-term horizon appear elevated. Consumer prices are expected to be under the pressure of rising prices in global markets. On account of projections for high prices of oil and agricultural products in those markets, the baseline projection of inflation is elevated, compared to previous months. However, anchoring of public inflationary expectations and the presence of significant second-round effects are key drivers to actual inflation rate.

Concluding the discussions, the Supervisory Council decided to raise the key interest rate by 0.25 percentage point, to 5.25 percent. Key interest rate rise is intended to create appropriate monetary conditions for preserving price stability over the medium run. It restores the actual real interest rate in line with its historical trends, following the sharp decline as a consequence of elevated inflation and its projections. It also reflects the expected impact of fiscal policy on the economy, preserving the stimulating position of macroeconomic policies, making them more prudent in the light of new reality. In line with the long-term horizon of monetary policy stance, anchoring inflation expectations of the public at the Bank of Albania's 3% target remains the final objective of this movement, aiming to prevent and minimize the second-round effects.

The Bank of Albania deems that this timely step would contribute to curbing the overall or speculative price rise, without impeding the economic growth sustainability.