Publication Date 20.12.2017
Dear media representatives,
First of all, let me start this last meeting for 2017 a little differently, thanking you on only for the careful coverage of the work and messages of the Bank of Albania to the public, but also for the constant attention you have paid to the results of the monetary, supervisory and regulatory measures and policies, for improving the economic and financial environment in Albania.
This conference coincides also with the last meeting of the Supervisory Council for 2017. In this meeting, we reviewed the Intermediate Monetary Policy Report, and reassessed our judgments on the current economic developments, the outlook and the adequacy of our monetary policy stance. In the following, I will present the conclusions of the report in greater detail.
The new information analysed in the intermediate monetary policy report in December resulted overall in line with our expectations. Likewise, the updated projections on the performance of the economic and monetary developments do not indicate substantial changes from the previous projections.
Based on these considerations, the Supervisory Council deemed that the current stance of the monetary policy remains adequate. Our accommodative monetary policy stance has reduced the costs of financing for the private sector, has boosted credit in the domestic currency and has contributed to the improvement of the borrowers’ financial situation. It has thus underpinned the expansion of economic activity and has created the necessary conditions for the return of inflation to target.
Financial markets are characterised by a relatively calm performance over the last two months, amid low interest rates, contained risk premiums and stabilizing exchange rate. Yet, the growth of credit to the economy remains sluggish, standing at a yearly 3.5% in October. The credit portfolio expanded driven by the expansion of the lek credit, whose portfolio recorded a 9.3% annual growth.
Economic activity in Albania continued to expand in the third and fourth quarters, although some indirect indicators suggest a slight slowdown in the second half of the year.
Economic growth has reflected the favourable financial environment, improvement of confidence, impulses generated by increasing employment and high levels of foreign direct investments, as well as the positive momentum in the economies of our trading partners.
In terms of aggregate demand, growth was driven by the expansion of private consumption and investments, and the improvement of the balance of foreign trade, especially in the third quarter. In response to the reduction by around 10.5% of the trade deficit in goods and services, the current account deficit fell to 4.6% of the GDP in the third quarter, one of the lowest levels in the last decade. On the other hand, the fiscal stimulus is estimated to have trended downward in the third and fourth quarters, albeit budget revenues and expenditure have continued to record high growth rates.
The constant expansion of the aggregate demand has led to an increasingly higher utilisation of production capacities. The unemployment rate fell to 13.6% in the third quarter, down by 1.1 percentage points from the same quarter in the previous year. However, the gradual convergence of the economy toward its equilibrium is yet to be accompanied by inflationary pressures’ build up, sufficient enough for the return of inflation to target.
Inflation stood at 1.9% and 1.7% in October and November, respectively, recording only a slight improvement from September. It has resulted on the down side of our expectations. The performance of headline inflation was dictated mainly by food prices.
In macroeconomic terms, the slow increase in inflation continues to reflect the combined effect of several factors: the negative output gap continues to contain pressures for the increase in labour costs and core inflation; inflation rates in our trading partners remain low; and, the appreciated exchange rates lowers further the import prices for commodities and consumer goods.
In our judgement, the decelerating effects from these three factors will diminish gradually in the future.
Our projections point to a further improvement of economic activity in the medium-term horizon. The expansion of the economic activity will enable a further increase in employment and will contribute to faster growth in wages and production costs. These developments will be underpinned, among others, by favourable financing conditions and a better outlook for crediting. The further decline in the NPL ratio, which recorded 14.3% in November, shows that the balance sheets of the banking system are improving and that the credit risk is trending downward.
In parallel to domestic pressures build up, inflationary pressures in the global economy are expected to increase in the medium-term horizon, whereas the strong decelerating effect of the exchange rate is expected to diminish.
Based on these factors, the Bank of Albania expects that inflation will return to target within the first half of 2019.
Judging on the analyses and projections from the baseline scenario, as elaborated above, the Supervisory Council deems that the current monetary policy stance remains adequate. Taking into account these circumstances, the Supervisory Council decided to:
Keep the policy rate unchanged, at 1.25%;
Keep the interest rates on overnight deposit and overnight credit facilities, unchanged at 0.25% and 2.25%, respectively.
Also, based on the available information, the Supervisory Council finds that:
The intensity of the monetary stimulus will not diminish before the fourth quarter of 2018. The accommodative monetary policy stance implemented by the Bank of Albania has had positive effects on boosting aggregate demand, bolstering economic activity growth, and contributing to the gradual return of inflation towards the target;
The balance of risks to our projections remains on the down side. Compared to projections of the baseline scenario, a slower rise of inflation rates in our trading partners, a further appreciation of the exchange rate, a more sluggish credit growth, or a lower sensitivity of wages against employment gains, could result in lower inflation rates compared to our expectations.
Under these circumstances, the Supervisory Council finds it appropriate to emphasise that in the event of the materialisation of these shocks or of their potential adverse impact on inflation expectations, the achievement of the inflation target may require adopting an even more accommodative monetary policy stance. In response, the Supervisory Council would be ready to take into consideration the further easing of the policy.