PRESS RELEASE
Welcome address by Governor Sejko at the Conference ''Negative Euro Area Interest Rates and Spillovers on Western Balkan Central Banks' Policies and Instruments''

Your Excellency Ambassador Graf,

Dear Mr Savastano,

Dear participants,

I am privileged and honoured to open this conference, co-hosted by the Bank of Albania and the International Monetary Fund, with the valuable financial support from the Swiss Government.

This Conference focuses on the investigation of economic and financial spillovers on Western Balkan countries from negative interest rates in the euro area. These negative interest rates have reflected the accommodative monetary policy stance, implemented aggressively by the European Central Bank, through both conventional and non-conventional monetary policy instruments. The agenda of this Conference is very ambitious.

It aims, from three difference perspectives, to discuss and analyse the implications of the recent ECB's monetary policy for the countries in our region. These perspectives consist in: financial stability, reserve management and monetary policy.

In a final analysis, this conference aims at establishing a high-level forum for policymakers in the region and beyond, to exchange views on challenges in formulating specific policies, optimum response forms and their effects.

The term 'Western Balkans' refers to six EU candidate or potential candidate countries in the region, namely Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Montenegro and Serbia. The regional perspective is useful for as long as the economic structures of these countries are similar. In most of the cases, these similarities reflect a common background of our journey toward a market economy and the strategic objective of membership in the European Union and the euro area.

These common goals represent fundamental anchors for the policies of the regional countries.

The regional economies are closely intertwined to the euro area through some important channels:

• First, the trade channel: euro area countries are our main trading partners. In the case of Albania, for example, exports toward euro area countries account for around 3/4 of our total exports.
• Second, capital flows from foreign direct investments, portfolio investments, or bank financing. Foreign direct investments from the euro area account for around 64 per cent of total foreign direct investments in Albania. Also, subsidiaries of euro area banks have a considerable share in the market, in many countries of the region. Meanwhile, in Albania, their share has been downward; yet, these subsidiaries account for over 55 per cent of the banking industry.
• Finally, remittances, from EU countries are an important source of available income and foreign currency inflows in the region. In Albania, remittances account for around 6 per cent of the GDP, and most of it originates from euro area countries.

Based on this overview, one would naturally conclude that the countries in our region are significantly exposed to recent economic and financial developments in the euro area.

I would like to mention a few of such important developments.

Low inflation rates in the euro area have been transmitted to our economies, thus rendering the achievement of our price stability objective more difficult. Since September 2012, core inflation in euro area and regional countries has diverged from the overall average inflation rates in the rest of the world. The synchronised disinflationary trend throughout Europe suggests a spillover of low inflation rates from the euro area toward the Western Balkan countries.

The sensitivity of regional countries to disinflationary trends originating in the euro area is determined by the size of their trade with euro area countries and the exchange rate regime. In the case of Albania, imported goods satisfy around 40% of domestic demand and their prices affect the overall level of prices in our economy. However, this ratio is lower than in other CEE countries, which are more exposed to the spillover of disinflationary effects from euro area countries through the trade channel. On the other hand, the implementation of a modern inflation targeting regime in Albania, the application of a free-floating exchange rate, and the swift and determined response of the monetary policy in Albania contributed to withstanding foreign disinflationary pressures.

Beyond their impact on inflation, the negative interest rates in the euro area as a response to low inflation rates have had some consequences in the regional countries. The first effect is positive, for countries like Albania, which show a cyclical convergence with the euro area and faced similar negative shocks on prices and economic activity. For as long as negative interest rates resulted as successful in preventing deflation and further deepening of the crisis in the euro area, they also helped central banks in the region to accomplish their price stability mandate. Moreover, countries of the region benefited from capital and portfolio inflows from euro area countries, triggered by negative interest rates in the euro area and large asset purchase programmes of the European Central Bank.

Yet, negative interest rates in the euro area have introduced also specific challenges for the monetary policy of the countries in the region.

• First, they rendered more difficult the assessment on the lower bound of the policy rate in our economies, or the separation point between conventional and non-conventional monetary policy instruments.
• Second, they have changed the relative rates of return financial instruments denominated in the domestic currency and in foreign currency, generating thus, both opportunities and challenges in the efforts to limit the level of the euroisation in our financial systems.
• Third, they have reduced the profit from investing our foreign currency reserve assets, producing, in some cases, negative yields. This result becomes even more important as, unlike in other countries, there is limited space to diversify the reserve in more foreign currencies. Therefore, we faced concrete deformations and challenges for our required reserve system, especially related to modalities on the required reserve remuneration.

In addition, our financial systems have been dictated by the presence of euro area bank subsidiaries, which were exposed to the tightening by the regulatory framework in the European banking sector. This tightening was a result of the weaknesses in the system arising from the financial crisis.

In the long term, we should all be able to benefit from a stronger, better capitalised, and more stable European banking system. However, in the short term, the adaptation to this new regulatory environment is a challenge to the countries of the region, due to several specific factors:

• First, it has introduced trends of reducing the exposure of many European banks to the countries of our region.
• Second, it has promoted the adoption of new and tighter lending standards at group level, which often do not reflect the specific characteristics of each country or market, in which these banks operate.
• Third, the criteria of equivalence in the supervisory and regulatory framework are yet to be determined, which implies that exposure to the regional countries are treated by European regulators and European banking groups with a higher risk coefficient.

These factors have contributed to euro area bank subsidiaries adopting a different behaviour, in their business activity, vis-a-vis other banks from outside the euro area or domestic banks. Such divergent behaviours are very evident in Albania.

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Dear participants,

In this conference, we have prominent speakers, who, I am confident, will discuss these topics thoroughly over the two days of the conference. I am confident that all of you will share your precious knowledge on these challenges and hope that we will all be able to benefit from mutual experiences.

At the same time, we have prepared a very interesting social programme, including a visit to the Museum of the Bank of Albania and a guided tour in Tirana.

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Concluding, I avail myself of this opportunity to thank our long-term partners and co-hosts of this conference.

The Swiss Government, through the State Secretariat for Economic Affairs SECO, has supported the Bank of Albania over the years in a number of initiatives and has funded important projects in the framework of technical cooperation. In the context of this intensive and successful cooperation, they are sponsoring the organisation of this conference.

I would also like to thank the IMF for the valuable technical assistance, which has contributed to building the human capacities at the Bank of Albania over the years. The fruitful cooperation continues, and the organisation of this conference is an example of it. In addition, they have helped with the presentations.

I would like to thank once again Ambassador Graf and Miguel Savastano, IMF's Monetary and Capital Markets Department Deputy Director for their support.

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Dear participants,

It is an honour for me to welcome you all to Tirana. I hope you find the conference useful and the social programme an interesting experience.

Thank You!