PRESS RELEASE
Speech by Gent Sejko, Governor of the Bank of Albania on the monetary policy decision of the Supervisory Council of the Bank of Albania, 1 July 2015

Today, on 1 July 2015, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged at 2.0%.

Let me share with you the underlying reasons and expected effects relating to this decision.

Inflation performing below the target and cyclical weakness of the economy have determined the pursuit of an accommodative monetary policy in recent years.

While this policy's outcome resulted in the expected direction, inflation persists below the target and the economic activity remains below potential. The performance of these indicators dictates maintaining the direction and intensity of the monetary stimulus.

Inflation was characterised by an upward trend in the first five months of the year, yet this trend is fragile and inflation remains below the target.

The rate of inflation descended to 1.8% in May, being in line with our assessments for a temporary effect of supply-side shocksduring the first quarter of the year. The fall in food prices in May and in the global oil prices led to the fall in inflation in this month. Other CPI basket items continued to provide low and steady contribution to the increase of domestic inflation.

The performance of inflation continues to reflect low inflationary pressures, arising from both cyclical weakness of the economy and low inflation rates in global markets. These factors are expected to remain present for some quarters ahead. Inflation is expected to range within the 1.8-2.2% interval during 2015, and is expected to pursue an upward trajectory towards the target, over the next two years.

The economy is expected to grow, gradually, and economic activity is expected to remain below the potential during 2015.

Incoming data from the real sector endorse our previous assessments for the slowdown of the economy during the first half of the year. From the production side, economic activity suffered the consequences of floods and fall in global oil prices. From the demand side, economic growth was driven by the improvement of the balance of exchanges in goods and services with abroad. Private domestic demand is assessed as weak, although it has made a small positive contribution to economic growth. In particular, private consumption was affected by the payment of electricity bills in arrears. On the other hand, the fiscal policy and indicators continued the consolidation path. Budget deficit was downward until May, whereas public expenditures were slightly up in annual terms.

The accommodative monetary policy stance is reflected in overall downward interest rates, but the response of the economy to better financing conditions remains slow.

The monetary stimulus has been transmitted in financial markets: costs of funding the public and private sectors are currently at their historical low levels. Financial markets operate at good liquidity levels, but the banking sector appears hesitant for financing long-term projects. Moreover, households and businesses show low interest to finance consumption and investments through bank loans. Therefore, lending growth in the first four months of the year was lower than expected. The Bank of Albania expects lending to grow at slow rates in 2015, and faster in the years ahead. Sound balance sheets of the banking system, the programme for the treatment and reduction of non-performing loans, and the expected recovery of credit demand are expected to trigger a faster growth of lending.

Concluding the analysis, the Supervisory Council of the Bank of Albania deems that the incoming information does not alter our expectations for economic and financial developments in the medium term.

The economic slowdown noted in the first quarter is expected to be temporary. Thus, our projections on the expected economic developments in the medium term do not change. Economic growth is expected to improve during the second half of 2015 and in the next two years. Stimulating monetary conditions will boost the growth of consumption and investments, hence creating premises for the acceleration of economic growth and the return of the economy to equilibrium. A better capacity utilisation will drive the rise in wages and employment, and the firm return of inflation to target.

In accordance with these projections, the current direction and intensity of the monetary stimulus in the economy is adequate for compliance with our inflation target.

The velocity of the return of inflation to target is assessed as consistent with maintaining economic and financial balances. Based on the analysis and projections, the Supervisory Council deems that the firm return of inflation to target will require keeping the interest rate low for some quarters ahead.

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In today's meeting, the Supervisory Council of the Bank of Albania analysed the most recent developments in Greece, the potential risks and spillover channels, and the actions of the Bank of Albania to manage them on an on-going basis.

The Supervisory Council informs the public that the financial system is completely sound, with ample liquidity and a high capitalisation rate. For a number of years, the Bank of Albania has implemented a policy of added prudence towards the banks with Greek capital holding, imposing on them more conservative conditions related to the capitalisation and the liquidity levels. The latest data show that the Albanian banking system is exposed to neither the Greek public sector nor to other private Greek groups. Banks with Greek capital in the Albanian banking system share 15% of the total banking system, compared to 25% at the end of 2008.
 
The Supervisory Council emphasises that the decisions by Greek authorities related to control over the movement of capital or the temporary interruption of the banking activity in Greece do not affect, neither directly nor indirectly, the Albanian banking system activity, including the licenced banks with Greek capital. The latter are Albanian entities which conduct their activity in full compliance with the legal, regulatory and supervisory framework that is applicable in the territory of the Republic of Albania.

The Supervisory Council assures the public that it is closely and continually monitoring the situation inside Albania and abroad. We are carefully assessing any scenario that may arise from the evolution of the Greek crisis, which may dictate a revision of our economic projections. In any event, we stand ready to undertake all the necessary measures to comply with our objective of price stability. In collaboration with our strategic partners, particularly the International Monetary Fund and the European Central Bank, we will take the appropriate actions to safeguard and preserve intact the economic and financial stability of Albania.