PRESS RELEASE
Governor Sejko: Statement to the Press Conference on the Monetary Policy Decision of the Supervisory Council, 6 April 2016

The Supervisory Council of the Bank of Albania reviewed today the intermediate monetary policy report. Intensive attention was paid, during the discussions, to the analysis of the actual and expected performance of inflation, and its implications for the monetary policy.

These analyses confirmed the previous conclusions of the Bank of Albania that the rapid fall of inflation, during the first two months of the year, reflects the effect of low oil and food prices. The new information on the real sector's activity is overall in line with our expectations and does not signal any fall in aggregate demand. Consequently, supply-side shocks are expected to be transitory and not to impair the return of inflation to target, within the time horizon communicated previously by the Bank of Albania.

Yet, supply-side disinflationary pressures will continue to keep inflation at low rates for some months ahead. The Bank of Albania has, therefore, revised down its inflation forecast for 2016. Against this backdrop, the Bank of Albania considered that the intensification of the monetary stimulus to the economy is imperative.

Based on these developments, the Supervisory Council decided to lower the key interest rate by 0.25 percentage point. This decision aims at guaranteeing the return of inflation to target in the medium term.

Let me now explain our assessment in greater detail.

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Annual inflation recorded a rapid decline in the first two months of the year. Its annual rate fell to 0.2% in February against the 2% recorded in December 2015. Our analyses show that the fall reflects the combined effect of three factors: (i) low inflation from food items, especially fresh seasonal products; (ii) direct and indirect effect of low oil prices; and, (iii) high comparative base of prices in the same period a year earlier. These three factors explain around 3/4 of the fall in inflation during this period.

The effect of the high comparative base is expected to disappear within the month of April. On the other hand, low oil and food prices have impaired the inflation performance in all the countries of the region and our trading partners. Looking ahead, these factors are expected to continue to exercise their impact on inflation in the coming months. Thus, updated forecasts suggest that inflation will range around 1.9% at the end of 2016, compared to 2.3% in our previous forecast.

Regarding the factors having a steady and long-term impact on inflation, aggregate demand and capacity utilisation rate in the economy, our judgement has not changed. Domestic inflationary pressures are still weak, reflecting the below-potential economic activity and the still-low pressures for a rise in wages and production costs.

The Albanian economy is, however, on a positive development track and these pressures are expected to rise gradually in the medium-term horizon. Inflation is expected to return to target in the second quarter of 2018, in line with the expected progressive improvement of the Albanian economy.

New data on economic activity are in line with our expectations.

Direct information on the performance of private consumption and investments is not available, but indirect data obtained from fiscal and foreign trade indicators suggest for their positive performance.

On the other hand, the fiscal policy adopted a consolidation stance in the first two months of the year. Budget revenues recorded two-digit growth rates in the period, while public expenditures reduced and the budget balance resulted positive for around ALL 9.9 billion. In accordance with the approved budget, the fiscal policy stance will remain consolidating throughout 2016, but the intensity of consolidation is expected to be downward in the rest of the year.

The performance of Albanian exports was impaired by low oil prices in international markets. Trade deficit expanded by around 11.8% during January-February, in response to the fall in exports and rise in imports.
In line with our earlier assessments, the external environment is expected to remain unfavourable for the growth of exports of Albanian goods during 2016.

As a result of the accommodative monetary policy stance of the Bank of Albania, financial markets are characterised by ample liquidity and interest rates are trending down. Recently, these trends have been reinforced by the shift of public borrowing in foreign markets. The costs of funding the public and private sectors are close to minimum historic levels. Also, liquidity premiums are downward and the activity in the interbank market has improved.

Nonetheless, lending remains sluggish. Cleaned up from the effect of non-performing loans write off, the portfolio of bank credit to the private sector recorded 2.6% annual growth in January. In line with our previous statements, the sluggish credit performance reflects the low demand for loans and the tight supply by banks. Looking ahead, the credit demand is expected to improve in the medium-term horizon, in accordance with the expected improvement in the economic activity. On the other hand, the Bank of Albania deems that the solution of issues pertaining to non-performing loans and collateral execution will have a primary impact on the improvement of the credit supply.

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In conclusion to the discussions, the Supervisory Council decided to lower the key interest rate by 0.25 percentage point. After this reduction, the key interest rate falls to 1.5%.

This further easing of the monetary policy aims at providing an additional impulse to economic activity, by stimulating the growth of domestic demand and increasing its support with banking credit. The economic activity strengthening is expected to intensify domestic inflationary pressures, compensating for the disinflationary trends originating externally.

Also, this action signals the determination of the Bank of Albania to guarantee the stability of prices, in conformity with its medium-term inflation target. The Bank of Albania reiterates that it is committed to and has the necessary instruments available for achieving this objective. Looking ahead, it will constantly monitor prevailing economic conditions and stands ready to further ease the monetary policy stance, in the event disinflationary supply shocks affect the medium-term perspective of price stability.

However, based on the disposable information and on the interpretation of our forecasts, the Supervisory Council evaluates that the monetary stimulus will not weaken during 2016.

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To support the monetary policy decision and a swift operation of the interbank market, in today's meeting, the Supervisory Council decided to narrow the interest rate band applicable in the interbank market, from 3.5 percentage points to 2.5 percentage points. This band is determined by the overnight deposit facility rate and the overnight lending facility rate. After the lowering of the key interest rate and the narrowing of the band, the new interest rates on overnight deposits and lending facilities will be 0.25% and 2.75%, respectively.

These changes target the applicable conditions at which the Bank of Albania trades liquidity with commercial banks. This operation is aimed at reducing interest rate fluctuations in the interbank market and contributing to the pass through of Bank of Albania's monetary policy easing.

Questions and answers at the Governor's press conference on 6 April 2016