PRESS RELEASE
Speech by Gent Sejko, Governor of the Bank of Albania, on the monetary policy decision of the Supervisory Council, 2 September 2015

In the meeting held today, the Supervisory Council of the Bank of Albania reviewed the interim monetary policy report. The new information analysed in the report has been broadly in line with our expectations, although some indicators result on the downside of projections. Thus, our assessment on the medium-term dynamics of inflation and economic growth has not changed.

At the end of discussions, the Supervisory Council concluded that: the actual and expected trend of the development of the economy, the actual monetary stimulus and the expected improvement of the monetary policy transmission mechanism will enable the return of economy to equilibrium and of inflation to target within a medium-term horizon. Against this backdrop, the Supervisory Council decided to keep the key interest rate unchanged, at 2.0%.

In the following, I will explain in greater detail the analysis, projections, and conclusions underpinning this decision.

• Inflation is expected to rise gradually towards the target over the next two years

Inflation fell slightly in July as a result of lower prices of seasonal fresh foods. Our analysis suggests that these products' inflation fell in the summer months as agricultural production rose during this period. For this reason, this factor is expected to have, to a large extent, a transitory effect. Other consumer prices in the basket did not see significant changes.

From the macroeconomic aspect, low inflation rates reflect the effect of the sluggish aggregate demand and the low level of commodity and consumer prices in global markets. This effect is expected to persist in the short term. For 2015, inflation is expected to average around 1.9%. Our medium-term projections for inflation have not changed, but suggest that inflation rates will continue to rise over the next two years, and see a sustained return towards our 3% target by the end of 2017.

• Inflation is expected to return to target as the economy recovers gradually, in the years ahead

The new economic information analysed in this report is consistent with the above assessments.

New data on foreign trade for June complete the picture for the second quarter. The deficit of trade exchanges in goods fell 4.6% in annual terms, during the period, dictated mostly by the fall in imports of electrical energy. While the external environment remains unfavourable, we expect foreign trade to contribute positively to economic growth in the rest of the current year, and beyond.

New fiscal data for July point to a slight increase in revenues, and deceleration of public spending. The budget deficit for the first seven months of the year stood at around 45% lower than in the corresponding period in the previous year. Consistent with the medium-term fiscal plans, the Bank of Albania expects the consolidating fiscal policy to continue in the next two years.

Our assessment on the actual and expected performance of private consumption and investments has not changed.

In line with these considerations, the Bank of Albania expects economic growth to improve in the years ahead. The expected improvement of the financial situation in the economy, the amelioration of the external environment, and of the overall business climate will contribute to such growth.

• Private domestic demand and economic growth are expected to be supported by the improvement of financing conditions

Bank of Albania's monetary policy stance remains deeply accommodative. The historical minimum levels of the key interest rate, our liquidity injection operations, and our commitment to maintain this stance in the period ahead have contributed to the overall reduction of costs of financing the economy.

The new data subject to analysis suggest that the interest rates will remain at historical low levels, irrespective of the monthly fluctuations. In response, lek lending has increased 6.4 per cent annually, whereas the cost of servicing the debt to the private and public sectors has decreased.

Lending, however, continues to grow slowly as a result of the stubbornly-sluggish demand, conservative bank policies, and high risk premiums on lending. In addition, in response to regulatory measures by the Bank of Albania, the second quarter was characterised by the accelerated write-off of non-performing loans from banks' balance sheets. Excluding the effect of the write-offs, in annual terms, total lending to the resident private sector rose 2.4% in June, unchanged from the previous quarter.

The Bank of Albania expects lending to perform somewhat better in the rest of the year, and improve progressively in the next two years. This improvement will be supported by both the growth of demand and reduction of the perceived risk in domestic and foreign financial markets. Against this backdrop, the Supervisory Council considers that the implementation of measures for reducing non-performing loans will boost banks willingness to lend and enhance the monetary policy pass-through in the economy. Also, economic growth and acceleration of lending should be sustained by the continuation of structural reforms and further improvement of the business climate.

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

Maintaining the monetary stimulus is - among others - consistent with expectations for a consolidating fiscal policy over the period.

Based on the available information and on our assessments and projections, the Supervisory Council estimates that the monetary stimulus will not weaken until at least the first half of 2016.

On the other hand, the Supervisory Council deems that the balance of risks continues to be on the down side. The Bank of Albania will be monitoring the situation with priority and, contingent on new developments, stands ready to take all the necessary measures for achieving its objectives.
 Questions and answers at the press conference on 02.09.2015