PRESS RELEASE
Governor Sejko: Statement to the Press Conference on Monetary Policy Decision, 7 October 2020

Dear Ladies and Gentlemen,

Today, on 7 October 2020, the Supervisory Council of the Bank of Albania reviewed and approved the Interim Monetary Policy Report.

In line with our expectations, the available information suggests pandemic had a comprehensive and severe impact on economy in the second quarter, but it has been reducing in the following months.  The simultaneous fiscal, monetary and financial stimulus has been effective in avoiding the most negative consequences of the shock.  The easing of social distancing measures, the stability of financial markets and the soundness of banking sector's balance sheet, build up the premises for a gradual rebound of economic activity in the future.

After concluding the discussions, the Supervisory Council judges that the current monetary policy stance remains adequate. The current monetary conditions provide the necessary stimulus for fuelling economic growth and for inflation to converge to target within 2022. However, further escalation of the shock or the creation of difficulties in the monetary policy transmission mechanism would require an increase in the monetary stimulus.

Global economy is going through the most severe test in the last decades, Covid-19 pandemic.  The drop in economic activity, across many countries is in double digits, unemployment grew, while the financial situation of private sector worsened. The exceptional fiscal and monetary measures have alleviated the impact of pandemic, but the recovery outlook still remains surrounded by uncertainty.

Inflation, in Albania, averaged 1.3%, in July and August, down from the second quarter.  This fall has reflected the lower inflation rates in food items and in some services categories.  From the macroeconomic perspective, the inflation slowdown reflected the gradual fading out of the effect of supply-side shocks, and showed a more completed declining effect of aggregate demand in Albania and abroad.

According to INSTAT data, the economic activity in Albania recorded and annual fall of 10.2% in the second quarter.  This fall reflected the negative contribution of almost all sectors of economy and of the aggregate demand components.  In parallel, employment recorded an annual fall of 3.6%, while unemployment rate was up at 11.9%.  Data of the third quarter are still preliminary.  Nevertheless, the better performance of both tax revenues and exports, in addition to the improved business and consumer's confidence, suggest that the economic fall has continued, although at a slower pace than in the second quarter.

The Supervisory Council deems that pandemic effect on the economy will be reducing during the next quarters.  In the baseline scenario, the economic activity in Albania is expected to improve, but still remaining in negative territory, during the second half of current year, and return to grow in the next year. The growth in aggregate demand is expected to be accompanied by an increase in employment, wages and production costs, by supporting the convergence of inflation to target within 2022.

The occurrence of baseline scenario is conditioned by the further evolution of pandemic, its impact on the future behaviour of both businesses and consumers, the speed of economic activity recovery in our trade partners, and the timely reaction of public authorities and private sector.

The so for easing monetary, fiscal and financial policies have played a crucial role in facing the shock.  In more concrete terms:

• The fiscal stimulus has mitigated the shock impact on business and households’ finances;
• The monetary stimulus has reduced the financing costs in economy; has guaranteed the needed liquidity supply to the banking sector; and has created the necessary premises to boost lending; while
• The temporary easing of the regulatory framework on banking sector, has supported the timely extension of credit payments and has encouraged credit restructuring, in line with the common will and interest of banks and borrowers.

The Albanian financial market has operated smoothly, in reflection of these measures.  The interest rates continue to be close to historical minimum levels, while the exchange rate appears stable.  In particular, banking sector has continued to supply with liquidity the businesses and households in need.  The annual growth of credit to private sector averaged 6.4% in July and August, by reflecting a better transmission of economic policies stimulus, the soundness of balance sheets and the willingness of the banking sector to contribute in encountering the shock. 

Looking ahead, the Supervisory Council notes that the guaranteeing of economic growth requires maintaining the accommodative stance of the macroeconomic policies. Also, the Supervisory Council deemed that booth monetary and financial stability in Albania, are a positive premise for the recovery of economy and an essential precondition for its stability in time.

In this view, while the expected gradual reduction of fiscal stimulus in the future and the macro-prudential normalisation will help to safeguard the financial stability of the country, the monetary policy should continue to maintain its accommodative stance.

 

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At the conclusion of discussions, judging on the baseline scenario projections, the balance of risks surrounding them, the Supervisory Council of the Bank of Albania deemed that the current monetary policy stance remains adequate.

Taking into account these circumstances, 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 monetary policy will remain accommodative throughout the forecast horizon. The Bank of Albania will continue to maintain the current form of liquidity injection operations. This form guarantees the unlimited injection of liquidity quantity, till the end of the first quarter in the next year.

However, the Supervisory Council finds that the balance of risks continues to remain tilted to the down side. In particular, the downside risks arise from:

• Significant prolongation of the pandemic and possible re-introduction of social distancing measures to curtail it;
• Problems arising in the monetary policy transmission mechanism, in the form of: increased interest rates and financing costs to private sector; worsened credit supply; unexpected fluctuations in the other indicators of the financial market.

The Supervisory Council assesses that the materialisation of these risks would require further easing of the monetary policy stance.