PRESS RELEASE
Statement by the Supervisory Council of the Bank of Albania on the Monetary Policy Decision

Today, on 26 November 2014, the Supervisory Council of the Bank of Albania reviewed and approved the Monthly Monetary Policy Report. After scrutinizing the latest domestic economic and monetary developments, and following the discussions on their expected performance in the future, the Supervisory Council decided to lower the key interest rate by 0.25 percentage points, bringing it down to 2.25%. The Supervisory Council evaluates that the key interest rate cut will create better conditions for financing the domestic economic activity, helping thus the return of the economy to its potential and the inflation to target in the medium-term period

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Annual inflation was 1.4% in October, slightly lower compared to the previous month, and continuing to stand below the lower bound of Bank of Albania's target. It fell mainly due to the unusual reduction of prices for agricultural products, whilst other categories in the CPI basket made a slight positive contribution to the headline inflation.

The registered inflation rate was on the lower end of Bank of Albania's expectations. Our analyses suggest that, during September and October, it fell primarily due to temporary supply-side shocks. However, fluctuations recorded in recent months illustrate the fact that the steady return of inflation to target will be a long process.

In a longer-term context, the low inflation rates in the last quarters continue to be determined by the weak pressures from both the demand and supply-side. Albeit edging up, domestic demand results insufficient to fully utilise production capacities in the economy. The weak labour market and the low inflation expectations transmit weak pressures onto higher wages and production costs. This dynamic is reflected in the low core inflation rates. On the other hand, imported inflation remains low, despite inflation rates trending up in some of Albania's trading partner countries. Lastly, monetary expansion in the economy underpins low inflation rates.

The analysis of available indicators corroborates our earlier assessments and projections for positive economic growth in the second half of the year. From an aggregate demand perspective, economic growth is attributable to the growth of consumption and private investments, whereas developments in foreign trade and public expenditures have had a sluggish performance. Private sector demand is primarily supported by the improved household and business confidence, as well as by better financial conditions. Our projections indicate that the economy with follow an upward path in the medium term, supported by the continuity of structural reforms, the preservation of the stimulating trajectory of macroeconomic policies, and the expected amelioration of the global economy. The efficacy of initiated policies and reforms, as well as the external economic and financial environment, will define the performance and the recovery speed of the domestic economy in the future. 

The external economic environment has not supported the growth of Albanian exports. The nominal trade deficit expanded 10.4% in the third quarter. In contrast to the first half of the year, this performance was also affected by the decline in exports of goods. On the other hand, imports continued the upward trend that had begun in the last quarter of 2013, albeit at a more moderate pace.

Fiscal policy followed a consolidation stance in the first ten months of the year. The budget deficit was around 31% lower than the same period in the previous year. Revenues for the period were 12.6% higher, due to the good performance of tax-related revenues. For the same period, total expenditures were 5% higher, whereas capital expenditures contracted by 33% from a year earlier. In this period, around ALL 26 billion were paid back as Government arrears.

The monetary policy kept its accommodative stance, through the maintenance of the key interest rate at the record-low of 2.5%, the forward guidance on the monetary policy stance in the upcoming quarters, and the liquidity injection in the market. Interest rates in the financial markets were close to minimum historical levels. Nevertheless, the yields of government debt instruments showed a slightly upward trend in October and November.

The weak demand for financing was reflected in sluggish lending performance. The positive signals noted during the summer months for credit recovery were not confirmed in September. Credit outstanding to the private sector fell from a month earlier and its annual growth decelerated to 2.1%. Credit recovery is expected to be gradual and in line with economic recovery. In the meantime, the improvement of balance sheets of the private sector agents and the banking system is expected to support lending in the future. Annual monetary expansion was 1% in September, or 0.6 percentage point lower than a month earlier. The low monetary expansion confirms not only the weak domestic aggregate demand, but also the tendency to shift financial savings towards longer term deposits or government securities.

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After concluding the discussions, the Supervisory Council assessed that the prevailing current monetary conditions would yield a slower return of inflation to target than previously anticipated, due to stronger supply-side shocks and continued weakness of aggregate demand. Reflecting on these conclusions, the Supervisory Council decided to lower the key interest rate by 0.25 percentage points, bringing it down to 2.25%.

The strengthening of the stimulating trajectory of the monetary policy aims at further easing the financing conditions for private consumption and investments, helping thus the return of inflation to target and the economy onto its potential growth path in the medium term.  Judging from the available information, the Supervisory Council assesses that the monetary policy stance will remain expansionary for the upcoming quarters.