Publication Date 27.02.2008
The Supervisory Council of the Bank of Albania, in its meeting on 27 February 2008, reviewed and approved the "Review of monetary policy for the second half of 2007". After the economic and financial analysis the Supervisory Council of the Bank of Albania decided to keep the key policy rate unchanged at 6.25 per cent.
Please find below the speech of the Governor of the Bank of Albania.
The Albanian economy recorded positive performance during 2007 being characterized by a stable annual growth in line with the projections, inflation under control and further consolidation of financial stability. The preservation of optimal macroeconomic parameters during this year required high attention to developments in the global markets and in Albania, prudent analysis of these developments and the timely undertaking of preventive measures aiming at avoiding negative implications in the medium run. Preliminary projections provide evidence for the continuity of the current economic growth during 2008 while the Bank of Albania remains cautious of the domestic and foreign developments in order to ensure the achievement of the 3% inflation target.
The Albanian economy continues to grow under stable rates and in line with the projections. Real economic growth for 2007 is estimated to be about 6% or the same as the previous year. Transportation and telecomunication, trade, hotels and restaurants and industry were the main contributors to this growth. The more intensive activity in these sectors has offset the slowdown in construction. Despite the high demand for investments in real estates there has been an annual dropping of new constructions by 19%. The Bank of Albania re-emphasizes the need for undertaking structural reforms in agriculture, in order to enhance the efficiency and production in this sector and reduce the extent and effects of external shocks related with agricultural products in the medium run.
Average annual inflation rate marked 2.9% in 2007 being close to the Bank of Albania target of 3%. In average terms inflation target was reached despite the considerable fluctuations between the quarters as a result of supply-side factors' shocks which originated mainly from outside our economy and could not be forecasted earlier. Energy crisis, the rising oil and grain prices, and the import prices hike were the main supply factors to have led to higher inflation rates during August-September 2007. At the same time on the demand-side there has been a continuous growth of credit to the private sector. Although in the last two years it has grown at lower rates it remains a potential risk factor for achieving the inflation target.
In response to these developments and to the extent of their actualization in future inflation rates the Bank of Albania deemed it necessary to raise the key policy rate three times during 2007, by 75 basis points to 6.25%. By means of these decisions the Bank of Albania has aimed to mitigate expected inflationary pressures in economy in order to preserve the medium-term stability of consumer prices.
The developments in the external sector of economy provide evidence for the further growth of domestic demand. Despite the positive performance of exports, trade deficit increased by 27% in annual terms accounting for 28% of the GDP.
The second half of 2007 was characterized by a normal performance of budget spending and by the observance of new fiscal policy objectives announced at the beginning of the second half of the year in terms of income. According to the data made available by the Ministry of Finance the fiscal balance as of end November ended in a surplus of ALL 4.7 billion compared with the projected deficit of ALL 25.9 billion. The main reason behind this difference is the capital spending being only 3.4% higher than the same period the previous year.
The monetary developments in economy during the last quarter of 2007 were in line with the performance of real economic activity and observed the tendencies projected in the monetary programme. Broad money growth was characterized by a stable growth rate mainly supported by the maintenance of high lending rates to the private sector by the banking system.
The appreciating tendency of the lek to other foreign currencies observed in the third quarter of 2007 continued to be present in the last quarter both in nominal and real terms. It reflects the macroeconomic stability in the country, the increasing difference of interest rates between the lek and foreign currencies and the comparable inflation levels to our main trading partners. However, compared with the previous year, the lek fluctuated more during 2007 as a result of the developments in the international markets and the more active participation of domestic agents in the foreign currency market.
Although the credit growth rates have been continuously dropping in the last two years they remain high at about 48.5% as a result of the private sector's high demand for credit and the commercial banks' willingness to meet this demand. The share of credit to economy to the GDP grew considerably during 2007 by 8.8 per cent accounting in December for 30%.
Worth considering is the fact that the high growth rates of credit portfolio represent a normal process for a developing economy like Albania's, which is in need for further financial intermediation deepening. What is important in this process is that the credit growth should be kept under control in order to prevent the jeopardy to price stability and at the same time ensure its soundness and avoid certain undesired implications to financial stability in the country. The commitment of the Bank of Albania in this context has been and remains at the maximum. Apart from the macro prudential measures taken at the beginning of 2007 for reducing the credit growth and maintaining its quality the beginning of 2008 marked remarkable progress in preserving financial stability with the establishment of Credit Registry.
In 2007 we were again witnesses of the vital importance to the entire economy of the financial system, of the extent and new formats the financial crises may appear in as a result of the transformation of risk and the high velocity and level of their spreading due to the globalization of financial markets. Although our financial system does not seem to have been affected by these developments they have had our utmost attention in order to precede similar developments in the future when our markets become more sensitive to external shocks as a result of their integration and further deepening.
In conclusion I would like to re-emphasize the Bank of Albania commitment to achieving price stability. The Bank of Albania remains committed to timely and properly react to the added inflationary pressures or to the jump of inflationary expectations beyond our inflation target. I would also like to highlight that the anchoring of inflationary expectations is a duty and responsibility to be shared by all the decision-making institutions to the best of our work and joint success towards achieving long-term stability.