Meeting of the Supervisory Council of the Bank of Albania held on 29 April 2009

Publication date: 30.04.2009


The Supervisory Council of the Bank of Albania, in its meeting of 29 April 2009, reviewed and analyzed the performance of economic and monetary indicators for the first quarter of 2009. In conclusion, the Supervisory Council of the Bank of Albania decided to keep the key interest rate on repurchase and reverse repurchase agreements of one-week maturity term unchanged at 5.75 percent.

Please find below the Governor's speech.

Economic and financial events at home continue to occur amidst an unstable external setting. On a global level, the advanced and emerging and developing economies remain highly uncertain both in terms of crisis duration and extension of its negative impact. The tight financial situation and the reduced agents' confidence brought about the substantial fall of aggregate demand and slump in economic activity. Consequently, imports and exports fell in all economies and foreign investments reduced owing to the tightened lending conditions by the financial institutions.

The latest data on global economy attested to the magnitude of this crisis. The euro-zone economy recorded negative growth in the last quarter of 2008, the severest-ever contraction since the introduction of the Euro. The data on the first quarter of 2009 show that the euro-zone economy may have continued to contract at the same rates for this period as well. The U.S. economy suffered deep contraction in the last quarter of 2008 as well. The first signs of economic recovery in the U.S. were evidenced in the first quarter of 2009, resulting from the substantial fiscal measures put in place to recover the economy and spur the consumer spending.

The downward inflationary pressures attributing to the lower raw material prices gave room to central banks to implement easy monetary policies in order to assist the banking system and fuel lending to economy. In January and March 2009, the European Central Bank eased the monetary policy further by slashing the key rate to historical low. The Federal Open Market Committee decided to keep the key interest rate at 0-0.25 percent, the record low in the U.S.

The Albanian economy performed amidst stable consumer prices. The annual change in the CPI in the first quarter of 2009 continued to maintain the same contribution pattern of goods and services as in the year-end 2008. Annual inflation marked 1.9 percent remaining close to the lower half of the tolerance band set by the Bank of Albania. The decrease of inflation over this period owes mainly to the global fall of raw material prices. The low core and non-traded inflation rates attest to the fall of inflationary pressures on the domestic demand side. The pronounced and swift fall of inflation -in particular in the last quarter of 2008 and the first quarter of 2009-, the slower credit growth rates and the worsened consumer and business expectations for the future performance of economic activity and prices signal the slump in domestic and foreign demand. According to our analyses, the risks for inflationary pressures in the medium run are to a large extent balanced.

According to official data, the Albanian economy maintained the same rates over the last quarter of 2008 as in the previous quarters. Turnover indicator for the sectors of production and services increased by 22 percent in annual terms. Construction and services provided the main contribution to the growth of economic activity. In contrast to the satisfactory performance of domestic economy, the external sector attests to the decrease of trade exchanges with the world over January and February 2009. Imports and exports fell over this period being followed with the narrowing of trade deficit by 4.3 percent. Notwithstanding the higher downward rate of exports to imports, the latter's high base has led to the narrowing of the trade deficit.

Fiscal developments over the course of the first quarter of 2009 were by and large in line with the budget framework for the year 2009. Fiscal policy was characterized by the rapid increase of capital expenditure and by controlled budget deficit levels. This deficit was mainly financed through the privatisation receipts over the first quarter. The tight liquidity conditions in the banking system were reflected in the banks' reluctance to meet the Government's need for funds and in the increased costs. In light of the possible fiscal risks in the short run, the tightening of lending conditions encumbers the financing of the planned budget deficit. To this purpose, the Bank of Albania calls for the revision of projected expenditures in order to make the necessary corrections according to the priorities.

Monetary developments over January and February 2009 attest to the slowdown of demand for money, owing mainly to the marked contraction of credit to economy. The tightening of lending standards and terms has led to reduced supply and demand for loans from the economic agents. This situation was reflected in a pronounced slowdown of money supply growth rates compared with September 2008. On the supply side, the monetary developments over this period were characterized by the tendency of shifting toward more liquid components. On the demand side, the structure of domestic demand for money remained relatively unchanged, being dominated by credit to the private sector. As of end February, the banking system intermediated 67 percent of total deposits to finance the private sector's activity.

Owing to the reduced amount of liquidity in the banking system, the annual growth rates of lending shrank considerably in the first two months of 2009. Excluding the exchange rate effect, the annual growth rate of loan portfolio slowed down further to 29 percent in February. Although the slump in lending activity leads to stable foreign currency position at home, the prolonged contraction of lending may affect the economic activity in the country. Accordingly, the Bank of Albania is supplying the banking system with the necessary liquidity and in co-operation with the latter is working on controlling the credit elements that are non-cost related but which affect its performance.

The performance of loans by currency attests to the banks' tendency to shift from lending in foreign currency to lending in domestic currency. As of end February, Lek-denominated loans accounted for 29 percent of loan portfolio, up by 2 percentage points compared with the average share in 2008. This shift is considered a positive development for the Albanian banking system. Banks' greater inclination to lending in the Albanian Lek gives more room for greater monetary policy efficiency and for its impact over the behaviour of economic agents. In addition, the shift of the loan portfolio to the Albanian Lek would lower the exposure of the banking system's developments to the exchange rate movements and would contribute to strengthening and safeguarding financial stability at home.

The banking market experienced liquidity pressures in the last quarter of 2008. The Bank of Albania has been supplying the banking system with liquidity making use of its entire operational framework. The cut in the key interest rate in January aimed to reduce the banks' borrowing cost giving them room to transmit this decision to other banking products as well. The interest rates in the interbank market have dropped while the other markets do not seem to have reflected this decrease yet. The increase in the risk premium in economy and the tight liquidity situation led to higher interest rates in the primary market. The performance of the yields will largely depend on the need to finance the budget deficit and on the consistency of fiscal indicators with the projected figures and their materialization by the economic agents.

The interest rates on loans remained almost unchanged over this period, reflecting the banks' more prudent lending policies. On the other side, banks were inclined to maintain high interest rates on deposits, aiming at improving their liquidity situation. In turn, this has led to a widened interest rate spread between the Albanian Lek and foreign currency-denominated deposits, hence providing a positive impact on the exchange rate performance. The latter, being freely determined in the foreign exchange market by its supply and demand, depreciated in the first quarter. The same performance, although at higher intensity, was shown in other regional countries as well.

The global economic developments are expected to provide their impact over the Albanian economy as well. Our economy is integrated into the European financial markets and trade exchanges with the euro-zone countries have a considerable share in the overall output. The potential impact of the global economic crisis is expected to materialize in a slower economic growth over the year 2009. In addition, the current performance of prices and the Bank of Albania inflation forecasts signal downward inflationary pressures over the period to follow.

The global events have evidenced the high integration level and the chain effects of the crisis on the Albanian economy, hence calling for constant monitoring of the economic and financial activity at home and for co-ordinated measures to deal with the consequences of this crisis.

The Bank of Albania decided to cut the key interest rate by 50 basis points to 5.75 percent in January. This move attests to the persistence and commitment of the central bank to intervene timely and appropriately in order to meet its primary objective. The Bank of Albania will continue to work on anchoring the inflationary expectations to its 3 percent target, hence contributing to maintaining the macroeconomic balances and stimulating economic activity.

The Bank of Albania considers that the developments over the course of the first quarter of 2009 call for continued prudence in another pillar of vital importance - the financial stability. The harmonization of the two basic balances, the macroeconomic and the financial one, remain a constant challenge for any decision-making authority. The latest analyses evidence the risk factors this fundamental balance may be faced with in every economy. The Bank of Albania remains fully committed to further consolidating this balance.