Publication Date 28.01.2009
The Bank of Albania’s Supervisory Council assessed at today’s meeting the country’s economic-financial developments, based on the latest available information.
World economy and particularly the financial system were severely hit in the second half of 2008. The crisis that struck the heart of the global financial system was progressively and relentlessly passed through the economic activity of advanced economies, leading some of the latter into recession.
The Albanian economy has been resilient amid this hitting wave. According to the available official data and judging upon a number of indirect indicators, the Bank of Albania notes that the economic activity throughout the year has performed in line with the early 2008 projections, both in terms of economic growth and preservation of macroeconomic balances. The Bank of Albania in particular has met its primary objective mandated by law, contributing to the maintenance of price stability.
Economic activity at home has been almost entirely sustained by domestic financial resources. Operating within all the parameters of financial soundness, the Albanian banking system has been dynamic and effective in channelling the savings towards the funding of corporate production or household consumption. This process has been also facilitated by the macroeconomic stability which enabled the fall of risk premiums in economy and helped to gradually extend the investment horizon.
Notwithstanding the inflationary pressures of early 2008, mainly triggered by supply-side shocks, the annual consumer price inflation was brought back within the Bank of Albania’s target over the second half of the year. For this period of the year, annual inflation rates stood close to the Bank of Albania’s target, 3.0 and 2.5 percent respectively, in both quarters. The return of inflation to within the Bank of Albania’s targeted band was conditioned not only by the relaxation of supply-side shocks, but also by appropriate monetary conditions that enabled the balancing of demand and supply-side factors.
Monetary policy stance was neutral throughout 2008 and the base interest rate was kept unchanged, at 6.25 percent. Together with the strengthening of several banking supervision measures in terms of credit risk management, the monetary policy has led to a more balanced credit growth and has transmitted the appropriate stimuli for consumption and savings. The correct monetary policy and the keeping of inflation under check by the Bank of Albania have been also reflected in anchoring the economic agents’ inflationary expectations close to the 3 percent target of the central bank.
In this context, worth noting is the contribution of fiscal policy which has ensured the preservation of macroeconomic balances by keeping the budget deficit at adequate levels. On the other hand, the external sector of the economy continued to be featured by the deepening of current account deficit. The third quarter of 2008 recorded an increased current deficit. It accounted for 13.7 percent of GDP. In addition to enlargement of trade deficit, the deepening of current deficit was also triggered by the narrowing of the positive balance of revenues and current transfers’ account. Therefore, the dynamics in the balance of payments developments remains an area which needs constant monitoring by the Bank of Albania.
Monetary indicators had a stable performance in the second half of 2008, although some slow-down growth rates of deposits and loans were noted in the last quarter. In relative terms, the slow-down made up a small share of commercial banks’ balance sheet, but did not affect the banking system’s soundness indicators or impair its solvency.
The performance of money markets during the second half of 2008 was conditioned by the developments in monetary indicators and the real economy. As experienced by many countries, the increased vulnerability of banks to liquidity has brought about reduced interbank trading volume and upward interest rates on deposits.
In the meantime, the coverage ratio of Government demand for money decreased and some risk premiums increased in the last two months. This performance brought about the increase in Government securities’ interest rates and in a few cases in the loan interest rates. In response to these developments, the Bank of Albania intervened in the money market by injecting liquidity of different maturity terms. Also, in order to better satisfy the banks’ needs, the Bank of Albania changed in November the repo auction form to auctions with undetermined amounts.
Following previous public statements, the Bank of Albania points out that the global crisis impact on the Albanian economy will depend on its intensity and duration. As I have also mentioned previously, reduction of foreign currency inflows, of both current and capital nature, and the tightening of overall financing conditions are the channels exposing the Albanian economy the most to shocks of the global economic environment. The expected potential impact of these factors would materialize in a slower economic growth in 2009. On the other hand, the latest forecasts of the Bank of Albania on consumer price performance during the current period reveal a relatively sensitive alleviation of inflationary pressures.
Taking into consideration the above, the Bank of Albania’s Supervisory Council decided to reduce the repurchase agreement interest rate by 0.50 percentage point, to 5.75 percent.
Based on analyses, surveys and facts, the Bank of Albania noted that in January premises were created for more manoeuvring, implying a change in monetary policy stance towards interest rate reduction.
The decision I just announced will, inter alia, reduce the borrowing cost of banks. The Bank of Albania assesses that this creates premises for a positive response from the banking system to cut the interest rates of loans denominated in ALL.
Today’s stimulus is a timely step for sustaining lending to the economy and for contributing to further consolidation of the financial stability of the system. Through this decision, more breath is given to the country’s economic activity. It contributes directly to minimizing the negative effects deriving from the international crisis and helping the further maintenance of economic and financial balances at home.
The Bank of Albania will keep working on further consolidation of the financial stability, in the interest of the long-term economic development. In this regard, I would like to emphasize that confidence in the banking system and in its totally liquid and sound balance sheets would be the most rational behaviour for each individual, business or stakeholder of the Albanian society.