PRESS RELEASE
Speech by Gent Sejko, Governor of the Bank of Albania, on the monetary policy decision of the Supervisory Council, 16 december 2015

The Supervisory Council of the Bank of Albania reviewed today the interim monetary policy report. The Supervisory Council found that, albeit limited, new economic and monetary data analysed in this report were overall in line with expectations.

Thus, the new information does not change our assessment of the current and expected performance of the Albanian economy.

The Bank of Albania expects a progressive improvement of economic growth over the next two years. This growth will enable the return of the economy to equilibrium and of inflation rate to target, within a medium-term horizon. In line with these conclusions and following the lowering of the key interest rate in its previous meeting, the Supervisory Council deemed that the current monetary stimulus is at adequate levels.

Based on the above analysis, the Supervisory Council decided to keep the key interest rate unchanged at 1.75%.

Let me now explain these issues in greater detail.

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• Our analysis and projections suggest that inflation will rise gradually towards the target, in the medium-term horizon.

In October and November, inflation stood at 2.1%. This performance represents a deceleration of the fast-rising trend of inflation in the two previous months. It also confirms our earlier assessments of this rise due to temporary factors, while overall inflationary pressures remain low.

In terms of components, the level of inflation was determined by the contribution of the high inflation of foods, especially fresh and unprocessed foods. Prices of other consumer basket items contributed, overall, to the down side of inflation for this period.

From the macroeconomic perspective, the below-target inflation rate continues to reflect the below-potential growth of the Albanian economy. The insufficient growth of aggregate demand generates unutilised capacities in the labour and capital markets, which are associated with low pressures on the increase of production costs, profit margins and core inflation. Moreover, inflation fluctuations over the recent months have reflected supply-side shocks, in the form of fluctuations in imported inflation and supply in foods.

The Bank of Albania judges that the negative output gap and low prices in international markets will continue to be present over a short-term horizon. Their downward effect on inflation will offset the upward effect of high food prices.  Inflation is, therefore, expected to average around 2.3% in 2016, and to trend up and return to our 3% target by the beginning of 2018.

• The expected recovery of the economy in the years ahead will underpin the return of inflation to target.

The recovery is expected to reflect the increase in private consumption and investments during the period, whereas exchanges with abroad are expected to make a small positive contribution and the fiscal policy to pursue a consolidation trend. The new available information is overall consistent with these assessments.

The deficit in trade exchanges of goods marked 1.6%, slightly expanding in annual terms, during July-October, mostly on the account of the fall in the value of exports of crude oil and base metals. The fall in exports in the recent months reflects, to a large extent, the transitory effects of global prices' conjuncture. Albanian exports are expected to perform better in 2016, although dynamics in our trading partners appear as still problematic.

New fiscal data for October point to an increase in revenues, and deceleration of public spending. The latter were driven by downward payments for arrears, compared to the previous year. The budget deficit for the first ten months of the year stood at around 43% lower than in the corresponding period in the previous year.

• Economic growth will be supported by the further improvement of financing conditions.

The Bank of Albania continues to implement a stimulating monetary policy. This policy stance has driven down the costs of financing in the economy, to historically minimum levels. It has contributed to the steady growth of the credit portfolio in the national currency and has supported the expansion of private consumption and investments.

The monetary stimulus picked up further, following the lowering of the key interest rate in November. The transmission of this move in the financial markets has been satisfactory; yet, it remains incomplete. During the last two months of the year, the financial markets appear as liquid, the soundness indicators of the banking system are positive and the interest rates are shifting on the down side. These trends are expected to pick up further in 2016, reflecting our monetary policy stance and the significant reduction of public borrowing in domestic financial markets.

Loan dynamics showed a slight improvement in October. Excluding the effect of loss loan write offs, the annual rate of credit growth increased to 1.8% in October, from 0.9% in September. This positive development reflected mainly the growth in loans to enterprises.

Despite the improvement in October, lending remains sluggish, attributable to weak demand, conservative bank policies, and high credit risk. Credit growth is expected to remain at moderate levels in the short term and to pick up gradually in the next year. The expected improvement of economic activity in Albania and the effect of measures for reducing the non-performing loans stock will sustain the growth of credit demand and banks' willingness to accommodate this demand. Furthermore, the Supervisory Council reiterates that economic growth and acceleration of credit will be driven by the continuation of structural reforms and improvement of the business climate.

• At the end of the analysis, the Supervisory Council concluded that achieving the objectives of the Bank of Albania requires maintaining the accommodative monetary policy stance.

Keeping the key interest rate unchanged at today's meeting will create more space for the complete transmission of the monetary stimulus, given in 2015, to the financial markets and the economy.

Based on the available information, and on Bank of Albania assessments and projections, the Supervisory Council deems that the monetary policy will remain accommodative throughout 2016.

The Supervisory Council also judges that the balance of risks continues to be on the down side. The Bank of Albania will closely monitor the situation and, contingent on new developments, stands ready to take all the necessary measures for achieving its objectives.