PRESS RELEASE
​​​​​​​Governor Sejko: Statement to the Press Conference on the Monetary Policy Decision of the Supervisory Council of the Bank of Albania

The available economic and financial information, reviewed in the Intermediate Monetary Policy Report, has been overall in line with our expectations. The Albanian economy continues to record growth, inflation is moving gradually towards the target, financial markets are calm, and interest rates and financing conditions are consistent with the achievement of our inflation objective.

The updating of forecasts after the analysis of the new information did not reveal significant changes in the expected developments. In the absence of shocks, the positive economic trend, the favourable financing conditions, and the gradual improvement of confidence and of the external environment are expected to enable the return of the economy to equilibrium and of inflation to target within 2018.

In accordance with these conclusions, the Supervisory Council of the Bank of Albania deems that the current stance of the monetary policy is adequate.

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Annual inflation stood at 2.8% and 2.2% in January and February of the current year. Fluctuations in inflation reflected fluctuation in food prices, which were affected by weather conditions and developments in foreign markets. Other categories in the consumer basket continued to provide steady and positive contribution.

Fluctuations in inflation did not slacken its upward trend, which had started in the second half of the previous year. This trend was supported by the strengthening of domestic inflationary pressures, price rise in international markets, and gradual convergence of medium-term inflation expectations with the target.

The updating of economic analysis with new statistics shows economic growth continued, both in the last quarter of 2016 and in the first two months of the current year. Sources of growth are assessed to be stronger: in addition to the steady contribution by domestic demand, during this period, foreign demand is assessed to have provided added positive contribution. The domestic demand benefited from the increase in employment, monetary conditions, enhanced confidence of economic agents, and foreign direct investments. On the other hand, the rise in prices and recovery of demand in foreign markets has led to the growth of Albanian exports in goods during the period.

Acceleration during 2016 has drawn the Albanian economy closer to its potential and has activated a larger share in the production capacities. The unemployment rate fell to 14.2% at the end of the year, whereas the capacity utilisation rate has been upward. Against this backdrop, domestic inflationary pressures have been upward. Additionally, medium-term – two and three year – inflation expectations have picked up, recording 2.6% and 2.7%, respectively.

The coordination of macroeconomic policies has created an appropriate environment to stimulate the economy and support a stronger macroeconomic stability in Albania.

The fiscal policy has pursued a consolidating trend, reflected in the reduction of public deficit and debt. Yet, this consolidation trend was of a lower intensity at the end of the previous year and in the first two months of the current year. In January, the fiscal surplus amounted to ALL 7.9 billion, driven by the increase in revenues 0.2% and increase in expenditures 5.1%. While injecting a low fiscal stimulus in the economy, the consolidating fiscal policy stance has facilitated the monetary policy pass-through.

The accommodative monetary policy contributed to the reduction of financing costs for economic agents and the recovery of credit in the domestic currency. The transmission insofar of the monetary stimulus to the financial market may be considered complete. In particular, yields on government securities in the primary market reversed the upward trend noted at the end of the previous year. In line with our expectations, this behaviour reflected the improvement in the demand-supply ratio for these instruments, and the unchanged monetary and fiscal policies. The volatility in T-bill yields was not transmitted to products of other segments in the financial market. Financing costs for the private sector maintained low historical levels and "non-price" conditions continue to ease for households, but remain tight for enterprises, mainly for corporations.

Easing monetary conditions contributed to the continuous growth of the credit portfolio in lek. The volume of credit denominated in the Albanian lek grew by 11% in annual terms, offsetting the contraction in foreign currency credit in January. The upward trend of lek credit is an encouraging development, but the distribution of this growth points to its concentration in the households segments, whereas credit to enterprises continues to be sluggish. This performance is driven by the reluctance of banks toward this segment, the small qualitative demand, and the firms' ample liquidity available in the form of deposits. The growth in consumption and investments is expected to be accompanied by the absorption of enterprises’ liquidity and increasing demand for credit. Moreover, the credit supply is expected to ease, driven by the measures for reducing non-performing loans and promoting healthy credit. The further reduction of non-performing loans in February, now down to 18%, is an encouraging sign in this regard. Conditioned by the rapid weakening of actual uncertainties, the Bank of Albania considers that all the premises are in place for the lending activity to post growth during 2017.

The updating of macroeconomic projections has confirmed our earlier expectations for the monetary and economic outlook. According to the baseline scenario, the return of the economy to potential and the gradual absorption of spare capacities are expected to be accompanied by the strengthening of inflationary pressures. Annual inflation is expected to be around 2.4% for 2017 and return to our target within 2018. On the other hand, the balance of risks surrounding these projections is assessed to have moved on the down side, both in the short and in the medium term, driven by uncertainties in the domestic and external environment.

The performance of the economy and the materialisation of our expectations reconfirm that the current monetary policy stance is adequate.

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Based on these judgements, the Supervisory Council decided to keep the key interest rate unchanged at 1.25%. Moreover, the Supervisory Council decided to keep unchanged the interest rates on overnight deposits and loan facilities, at 0.25% and 2.25%, respectively.

Judging from the available information, the Supervisory Council deems that the intensity of the monetary stimulus will not be reduced before the fourth quarter of 2017. Furthermore, the intensity of the monetary stimulus will be recalibrated to correspond to the expected improvement trend for the economy.

Finally, the Supervisory Council reaffirms that this monetary policy stance contributes to maintaining macroeconomic equilibriums, in general, and achieving and maintaining price stability, in particular. On the other hand, the Supervisory Council reiterates that maintaining and further strengthening the pace of structural reforms, both with regard to the growth of economic potential and reduction of its weaknesses, is a precondition for guaranteeing steady and long-term growth.