PRESS RELEASE
Governor Sejko: Statement to the Press Conference on Monetary Policy Decision, 4 August 2021

Dear Ladies and Gentlemen,

Today, on 4 August 2021, the Supervisory Council of the Bank of Albania reviewed and approved the Quarterly Monetary Policy Report.

The new information we analysed shows the economic recovery is on track.

 
The Supervisory Council assesses that the supportive factors to the recovery of the Albanian economy are strengthened during the last quarters. Also, the economic outlook has been improving and the downside risks - though present - have been reducing. Nevertheless, the Supervisory Council notes that: inflation continues to undershoot the target; the pandemic consequences are still present in the economy; and the economic growth should be underpinned by a simulating fiscal-monetary policy mix.

In this perspective, the Supervisory Council judges that the monetary policy stance should continue to be accommodative throughout the medium-term horizon. The monetary stimulus will help to maintaining ample liquidity and low financing costs, by bolstering the expansion of consumption and investments in the private sector. In turn, this stimulus will serve to: the strengthening of economic growth stability; the increase of employment and wages; and the stable return of inflation to target.

Against this backdrop, the Supervisory Council assesses that the current monetary policy stance remains adequate.

[I will now outline in more detail the main findings in the Quarterly Report, our expectations for the future, and the reasons backing the today decision of the monetary policy.]

***

The new information for the recent quarter has been to the upside of our expectations.

In the second quarter, the average inflation was up at 1.8%, by correcting the fall recorded in the first quarter. This increase mainly reflected a higher inflation of fuels and food items, particularly in unprocessed food items. Meanwhile, inflation of other basket items was stable. In particular, core inflation - which better represents the balance of factors affecting the prices of consumption items in the medium term - was stable.

Overall, inflation, during the last quarter, was subject to frequent and unexpected fluctuations of supply-side factors, which have shown and are, expected to have a transitional impact.  On the other side, factors with a medium-term impact on inflation - increase of wages and production costs; prices in partner countries; and inflation expectations - appear stable, though, still insufficient for inflation return to target.

Our updated analysis and projections suggest these factors will strengthen in the next quarters, by supporting the return of inflation to target within 2022.

According to INSTAT data, the Albanian economy grew by 5.5% in first quarter, by exceeding our expectations. This growth reflected the simultaneous expansion in both consumption and investments of private sector, and the increase in the exports of goods. At the same time, it benefited from a higher base effect - due to the downside revision of economic growth of 2020 from INSTAT - and from transitional factors, like the swift increase of electrical energy production.  Available information suggests a strong acceleration of economic activity in the second quarter, although at a rate which will not be indicative for the further growth pace of the Albanian economy.

Notwithstanding this improvement, labour market showed a sluggish performance in the first quarter. Employment rate continued to be below the pre-pandemic level, unemployment rate increased at 11.9%, while market pressures on the rise of wages are still weak.  Based on the historic performance, the Bank of Albania deems that the stable increase of employment and wages will follow with a time lag the expansion of the demand for goods and services.

In macroeconomic perspective, the acceleration of economic growth has reflected the reduction of restrictions, due to the improvement of epidemic situation and the expansion of vaccination process, the increase of business and consumer's confidence, the improvement of external environment, and the simulating fiscal and monetary policies.

Fiscal policy has continued to maintain a simulating nature during the first half of year. Budget deficit stood at around 3.4% of GDP, in this period, by generating a positive fiscal incentive. This performance reflected the fast increase of expenditure as a ratio to income, despite the latter recorded an annual growth of around 37% in the second quarter.

The Bank of Albania has considered the simulating nature of fiscal policy as indispensable at the peak of the pandemic. On the other hand, along with the end of health and economic emergencies, we expect the Government to turn attention on the consolidation of public finances. Our projections for the future factorise a progressive reduction of fiscal stimulus during the second half of year and in the next period. 

On its side, the accommodative monetary policy stance of the Bank of Albania has continued to generate a calm financial environment, characterised by normal circulation of fund in the market, low lending costs and a stable exchange rate.

In the second quarter, credit to private sector grew 7.7%, on average, by continuing to reflect a relatively rapid upsurge of credit in lek, loans for investment purposes and house purchases. The reported growth of loan demand in the third quarter and the easing of lending conditions provide a continuous funding to meet needs for consumption and investments. The improved balance sheets of Albanian businesses have played an important role in this regard. They have been reflected in the 7.1% fall of non-performing loans ratio in June 2021.

The updated forecasts in this quarterly report suggest a positive performance of economy in the medium-term horizon, by revising upwards the projection of economic growth pace in the current year. The expansion in both consumption and private investments and the increase in the export of goods and services will underpin the economic growth. In turn, this performance will reflect the improvement in business and consumer’s confidence, the gradual normalisation of economic activity in partner countries, and the favourable financial environment in Albania. Further, the growth of aggregate demand will drive to the increase of employment and rise of wages, by establishing the premises for inflation converge to target within 2022.

These forecasts are based on the assumption, of avoiding strong restrictions on the economic activity due to the pandemic, and of the slow, but progressive reduction of fiscal stimulus in the medium-term horizon. 

***

Based on the above information, the Supervisory Council assessed that the monetary stimulus has been effectively transmitted in the financial markets. Also, it deems that this stimulus should continue to be present in the economy during the medium term as well, aimed at supporting ample lending to the economy and at a low cost, and to offset the expected reduction of fiscal stimulus.

In this view, the Supervisory Council decided to:

• Keep the policy rate unchanged, at 0.5%;
• Keep the overnight deposit and overnight lending rates, unchanged at 0.1% and 0.9%, respectively.

The Supervisory Council judges that the maintenance of an accommodative monetary policy stance, throughout the forecasting horizon, is crucial for the economic recovery and for inflation return to target.

Nevertheless, the materialization of baseline scenario would require a gradual normalisation of monetary policy, towards more stable interest rates. Any timely normalisation of monetary policy will be cautious, by neither compromising the stability of economic recovery and nor damaging the prospects for inflation return to target.

Also, the Supervisory Council finds that the downside risks have been reduced, though the epidemic situation continues to remain a source of potential shocks. Thus, the long-term impact of the pandemic on the economy, although at minimum level for now, still is subject of assessments.

Last, the Supervisory Council reiterates that the gradual normalisation of economic situation and the strengthening of recovery stability should put on the focus of the decision makers the need for accelerating the agenda of structural reforms. These reforms should aim at enhancing competition; further improving the investment climate and business environment; and the long-term strengthening of public finances stability.