PRESS RELEASE
Speech by Gent Sejko, Governor of the Bank of Albania, on the monetary policy decision of the Supervisory Council, 6 August 2015

In its meeting today, the Supervisory Council of the Bank of Albania reviewed and analysed the quarterly monetary policy report. The new available information is overall consistent with our projections. Deviations from these projections and fluctuations in some economic and financial indicators over this quarter are estimated to be transitory.

Our judgement on inflation dynamics and economic growth in the medium term has not changed. In accordance with these projections, the Supervisory Council deemed that the actual key interest rate is appropriate for achieving the price stability objective. Against the backdrop of the current circumstances, the Supervisory Council decided to keep the key interest rate unchanged, at 2.0%.

Following I will explain in greater detail the analysis and conclusions underpinning this decision.

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

Annual inflation averaged 1.8% in the second quarter. Significant fluctuations in inflation, over the first half of the year, reflected the dynamics of unprocessed food prices. These prices were highly volatile during February - April, also due to the floods in some low-lying areas in Albania.

From the macroeconomic perspective, the slow rise in prices reflects the effect of the weak aggregate demand and relatively low global prices. The effect from these factors is expected to persist in the short-term horizon. For 2015, inflation is expected to average around 2%. Bank of Albania's projections suggest that inflation rates will continue to rise further over the next two years and will see a sustained return towards our 3% target by the end of 2017.

• Inflation's return towards the target will be supported by the gradual recovery of the economy over the coming years.

To a larger extent, forecasts for inflation in the next two years are corroborated by our projections for a progressive growth of the economy and fuller utilisation of production capacities in the years ahead.

The most recent economic data are in line with the above-mentioned assessments. Economic growth for 2015 is expected to outpace the rates recorded in the previous year. According to INSTAT data, in the first quarter, economic activity grew 2.8% in annual terms. This rate was higher than our expectations and reflects mainly the growth in investments and net exports. Indirect available data point to similar growth rates for the second quarter.
The Supervisory Council deems that the second half of the year will see slower growth rates, due to the potential negative effects from developments in Greece. However, the agreement reached in July 2015 is a starting point for the normalisation of the situation there.

Subsequently, potential subsequent effects in Albania will concentrate on a temporary reduction in trade activity and remittances, without affecting the financial system's activity. As such, these effects are expected to be transitory.

From the monetary policy perspective, projections for economic growth and inflation in the medium term assume special importance. The Albanian economy is projected to see faster growth pace in the next two years. The balance sheets of the banking sector and the private sector, the external economic environment and the overall business climate are expected to improve over this period. These developments will support the expansion of domestic and external demand.

• Economic growth will be supported also by favourable financing conditions.

For a relatively long time, the monetary policy stance has been accommodative. The continuous lowering of the key interest rate, the forward guidance by the Bank of Albania for remaining in this territory in the future, the expected reduction of risk premiums and improvement of banks' balance sheets and financial soundness indicators are premises for further easing of financing conditions for the economy.

The Albanian financial markets continue to be characterised by a good liquidity situation. Lending interest rates and government securities' yields are close to their historic minimum. In response, lek lending has increased whereas the costs of servicing the debt to the private and public sectors has decreased.

Lending dynamics have been more positive in the second quarter. Thus, lending to the resident private sector grew 2.4% in annual terms in May, a higher rate than that recorded at the end of the first quarter. Credit growth was driven by the annual growth of lek lending by 7.5%; foreign currency lending, however, fell 0.7%. From the sectorial perspective, lending to households continues to record higher growth rates than lending to businesses.

The Bank of Albania expects a gradual improvement of lending for the rest of the year, and a progressive improvement of it in the next two years. This improvement will be supported by demand growth, low interest rates and reduced perceived risk in domestic and global financial markets. In particular, as government's demand for financing in the domestic market is expected to subside, more space will be created for the growth of lending to the private sector.

• Also, the Supervisory Council deems that the successful implementation of the measures for reducing the non-performing loans stock will boost banks' willingness to lend.

The portfolio of non-performing loans narrowed by 2 percentage points in the second quarter, mainly in response to regulatory measures undertaken by the Bank of Albania at the year start. This is an encouraging signal with regard to cleaning the balance sheets of the banking system. However, according to the approved inter-institutional plan of measures, it should be supported with legal improvements that will prevent the growth of non-performing loans and provide a rapid solution for them. In this context, the Bank of Albania would like to draw the attention of all public agencies engaged in this project to the need for a swift and rigorous implementation of the commitments we have jointly undertaken.

• Achieving Bank of Albania's objectives will require maintaining the accommodative monetary policy stance for some quarters ahead.

The increase of the monetary stimuli is consistent with the expectations for a consolidating fiscal policy during this period. As we have said before, the fiscal consolidation reduces risk premiums for the country and facilitates the pass-through of our monetary policy measures to the financial markets.

Based on the available information and on our assessments and projections, the Supervisory Council deems that the actual levels of the monetary stimulus will be upheld until at least the first half of 2016. On the other hand, the balance of risks remains on the down side. The Bank of Albania is closely monitoring the situation in Greece and its impact on the Albanian economy.

In the event developments there produce a strong, negative and extended impact on the Albanian economy, the Bank of Albania has the appropriate instruments and remains ready to take additional measures with a view to achieving its objectives.

Concluding, the Supervisory Council reiterates the need for the continuation and acceleration of structural reforms. Among others, these reforms should aim at sustainably improving the business climate, boosting the productivity and competitiveness of the Albanian economy, promoting domestic and foreign investments, and enhancing the economic and financial stability in Albania.