BANK OF ALBANIA

PRESS RELEASE
Governor Sejko: Statement to the Press Conference on the Monetary Policy Decision of the Supervisory Council of the Bank of Albania, 21 December 2016

Publication date: 21.12.2016

 

The new information analysed in this monetary policy report has been - overall - in line with our projections.

Data from the real and financial sectors show an improving economic activity, inflation rising gradually towards the target, and a favourable financial environment for accomplishing our objectives.

The updated round of our analysis and projections suggests that the Albanian economy will continue to improve in the medium-term horizon. In accordance with these projections, economic activity is expected to return to equilibrium within 2017 and inflation to target within 2018.

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Inflation in November was 1.9%, up by 0.4 percentage point from the previous month. The rise in headline inflation reflected the rise in food and oil prices inflation, whereas inflation of other basket items remained relatively unchanged.

The upward trend of inflation over 2016 was dictated, to a larger extent, by the increase in domestic inflationary pressures, in response to the growth of aggregate demand and the improvement in the capacity utilisation rate. The better utilisation in the labour and capital markets has created the premises for the increase in employment and wages, and has contributed to the improvement of the firms' operation margins. These trends are reflected in the continuous increase in the core inflation.

In parallel, the rise in inflation was fuelled by the weakening of foreign disinflationary pressures and the upward trend in inflation expectations.

The new information on economic activity is positive. Economic growth is assessed to have picked up in the second half of 2016, after the 3.1% growth in the first half. Growth was bolstered by the recovery of private consumption and investments, and underpinned by the increase in wages and employment, the improvement of confidence and the favourable financing conditions. In parallel, economic activity in the second half of the year was supported by the acceleration of the realisation of budget expenditures and the upward foreign demand in tourism.

The Bank of Albania expects a progressive improvement of economic growth over the next two years. The recovery of private demand will continue to be the main driver of growth, whereas the fiscal policy will remain on the consolidation side, and the external environment will continue to be characterised by weaknesses and uncertainties.

In line with the recovery of economic activity, and supported by the expected reduction of foreign disinflationary pressures, inflation is forecasted to mark a progressive increase and return to target within 2018.

The combination of the accommodative monetary policy with the consolidating fiscal policy will contribute to this pattern of developments. This combination addresses our objectives and challenges at an optimal level. Through the support of aggregate demand, our monetary policy stance creates the premises for the return of inflation to target. On the other hand, through the reduction of the public debt, the fiscal policy consolidation stance contributes to the reduction of risk premiums in financial markets and increases the space for credit to the private sector.

The monetary stimulus has been transmitted through lower levels of the policy rate, liquidity injection operations and the forward guidance instrument.

Financial markets have reflected this stimulus to a complete extent. Financing costs in the economy have settled at low historical levels, creating thus the premises for boosting consumption and investments. The recent volatilities noted in interest rates in certain segments of the financial markets are assessed to reflect specific developments in these markets and have not contributed to al tightening of monetary conditions in the economy.

Credit recovery continued, in October. Excluding the effect of the write offs from the banks' balance sheets, the total credit portfolio recorded 2.9% annual growth, in October. This growth rate reflected to a complete extent the dynamic performance of the new lek credit, whose portfolio registered 9.2% annual growth, in October, whereas the foreign currency credit remains sluggish.

The Bank of Albania expects a better credit performance in the next years, although banks' lending policies remain conservative. In this regard, the Bank of Albania deems that the improvement of the credit environment also in response to the joint action plan of measures for reducing non-performing loans will enable the further reduction of risk premiums and will pave the way for a better performance of both credit and economic activity in Albania.

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Judging from the above analysis and forecasts, the Supervisory Council estimates that the actual monetary policy stance is adequate for meeting our inflation target.

Against this backdrop, the Supervisory Council of the Bank of Albania decided to:

  • keep the policy rate unchanged at 1.25%;
  • keep the rates for the overnight deposit and lending facilities unchanged at 0.25% and 2.25%, respectively.

Furthermore, based on the available information, the expected developments and risks surrounding them, the Supervisory Council deems that the intensity of the monetary stimulus will not diminish before the second half of 2017.

Thank you!