PRESS RELEASE
Meeting of the Supervisory Council of the Bank of Albania held on 24 June 2009

The Supervisory Council of the Bank of Albania, in its meeting of 24 June 2009, reviewed the Monetary Policy Monthly Report. After analyzing the current economic and financial developments at home and discussing the expected future performance, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged at 5.75 percent.

The analysis of a range of economic and financial indicators suggests a slower economic activity at home over the course of the year 2009, in response to the effects of the global economic crisis. The moderated credit growth rates, the slowdown in money growth, the developments in the balance of payments in the early months of 2009, the performance of some fiscal indicators and the business and consumer surveys suggest that domestic demand has been slumping. This performance has been reflected in the reduction of businesses' capacity utilization and the dampening of domestic inflationary pressures. On the other side, the external inflationary pressures have been upward: the fall of primary commodity prices in the global markets has been offset by the depreciation of the Albanian Lek, hence leading to the price rise of some imported goods and a slight increase of inflation in May relative to the preceding month. The exchange rate devaluation effect is expected to become more complete in the following months, balancing the dampened inflationary pressures arising from domestic demand. Hence, the inflationary pressures seem balanced and the CPI inflation is expected to fluctuate within the Bank of Albania’s inflation target. This projection is also supported by the economic agents’ expectations, which remain anchored around the 3 percent target.

Global economic activity, as measured by economic growth, global trade and movements of capital flows slowed down further in April and May. The downward growth rates seemed to moderate in advanced economies, however the economic indicators do not provide evidence that economic recession is over yet. The prolongation and high intensity of the crisis have deteriorated the economic situation in emerging countries -including the regional countries-, while some of them have entered a recession. Primary and basic commodity prices remain lower than in the same period the previous year.

The May increase of inflation continued to reflect the devaluation trend of the exchange rate in prices of consumer goods. Year-on-year inflation marked 2.1 percent in May returning to the tolerance band of the Bank of Albania’s 3 percent target. Unprocessed and processed foods provided the main contribution to headline inflation with 1.8 and 0.3 percentage points, respectively. Administered prices provided a negative contribution of 0.4 percentage points, hence offsetting the positive contribution of “services”. Relatively slight supply-side shocks -such as the oil price rise-, triggered the increase of inflation in May.

The latest information and analysis attest to the slowdown of economic activity at home in the first quarter, expressed in the contraction of lending to the private sector, the fall of exports, the slow money growth rates and non-actualization of fiscal revenue projection. Confidence survey results confirm the downward economic growth rates in the first and second quarter of 2009, signalling the weakening of domestic and external demand.

The first quarter of 2009 attested to the deterioration of Albania’s external position owing to the current deficit widening by 25 percent relative to the previous year. The fall of domestic and external demand triggered the decrease in imports and exports, which in turn led to the slight narrowing of the trade balance deficit. Exports and imports of goods declined in annual terms by 14.7 and 5.6 percent, respectively. The fall in current revenue surplus and services brought about the deepening of the current account deficit. The deepening was not fully covered by capital and financial account inflows hence resulting in a slight balance of payments’ deficit for this period. This performance is being prudently monitored by the Bank of Albania, which is assessing in its decision-making process the possible implications for macroeconomic balances in view of ensuring long-term stability in Albania’s external position.

Fiscal indicators witnessed an increase in budget revenue and expenditure in the early months of 2009, although lower than the projection for this period. The increase of expenditure owed to a large extent to the higher capital expenditure, while the performance of revenue reflected the slowdown in economic activity over the first months of 2009. The balance of revenue and expenditure reports an increase in budget deficit beyond the projected figures. This performance requires an increased attention from the fiscal authorities in order to allow balanced budget revenue and expenditure. The preservation of the projected budget parameters will help to control the macroeconomic balances at home and facilitate the management of the domestic financial market.

As of April, the liquidity situation in the banking system has been improving. This performance has been reflected in the improved interbank market activity and the decrease of short-term interest rates. In the meantime, long-term interest rates increased further, reflecting both the imbalances of demand and supply with funds in these maturities and the higher risk premiums perceived by the suppliers. This performance has been also reflected in the increase of interest rates on Lek-denominated loans, which maintain the same tendency as the interest rates on Government’s long-term debt securities. On the other side, the decrease of interest rates in the international market did not reflect in lower interest rates on foreign currency-denominated loans in the domestic market. The Albanian Lek continued to maintain its devaluation trend in May, while its performance in June has manifested an appreciating behaviour owing mainly to the seasonal effects.

In response to the developments in real economy and the financial market, credit to economy slowed down further in April. Its year-on-year growth rate (excluding the exchange rate effect) marked 21 percent in April, relative to 25 percent in March. The tightening of lending standards has been most overwhelmingly experienced in the meeting of demand for foreign currency-denominated loans. In April, the share of Lek-denominated loans to total loans increased to 31 percent from 28 percent in the year end 2008.

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Based on the current developments in real economy, inflation and the financial markets, the Supervisory Council of the Bank of Albania decided “To keep the interest rate on repurchase and reverse repurchase agreements of one-week maturity unchanged at 5.75 percent ”.

The Supervisory Council of the Bank of Albania evaluates that this decision will help to maintain macroeconomic stability at home. It ensures long-term containment of inflationary pressures within the Bank of Albania’s tolerance band. In addition, it consolidates the financial system’s stability in Albania further by restraining the volatility in the balance of payments’ indicators and allowing for a more contained adaptation of economic agents to the new monetary and financial conditions.