Publication Date 07.02.2018
In today’s meeting, the Supervisory Council of the Bank of Albania reviewed and approved the Quarterly Monetary Policy Report. Based on its analyses and forecasts, we re-evaluated the adequacy of our monetary policy stance.
The following press release will inform you on the main conclusions reached by the Supervisory Council.
The new information analysed by the Supervisory Council resulted, overall, in line with our expectations. Similarly, our forecasts on the economic and monetary outlook have remained largely unchanged.
The Supervisory Council found that the progressive recovery of the economic activity is facilitated and will continue to be facilitated, among others, by the accommodative monetary policy stance. Based on the above analyses, the Supervisory Council assessed that the actual monetary policy stance is adequate.
Inflation rose slightly in the fourth quarter of 2017, illustrating the short-term nature of supply-side shocks, which had driven it down in the previous quarter. Headline inflation increased mainly due to the increase in the inflation rates in categories related to housing.
Albeit upward, domestic inflation remains subdued and below the 3% target of the Bank of Albania. In the macroeconomic aspect, this performance reflects the cyclical development stage of the Albanian economy and subdued imported inflation rates.
Although set on an upward path, aggregate demand remains inadequate to fully utilise production capacities, as illustrated by the fact that the unemployment rate remains above its natural level, and firms report that capacities are not yet fully utilised. This phenomenon impedes the increase in wages, production costs and profit margins, in line with our inflation target.
In parallel, inflation in our main trading partner countries continues to record low rates. The appreciation of the exchange rate in the recent quarters has decelerated further their pass-through to the Albanian economy.
The analysis of macroeconomic indicators suggests that the Albanian economy continued to grow in the second half of 2017, albeit at a slower pace than in the first half. INSTAT data shows that the Gross Domestic Product grew by 3.55% in the third quarter, slowing down from the 3.9% average growth rate registered in the first half of 2017.
From the sectorial perspective side, economic growth continues to be supported by the activity in the services sector, whereas its deceleration reflects the deceleration of the activity in the construction sector and certain branches of the industry sector. From the aggregate demand perspective, economic growth was supported mostly by the expansion in the private consumption, whereas its deceleration reflected the slowdown in investments and the negative contribution from foreign trade. Indirect available data suggest a similar performance of economic growth over the fourth quarter.
The monetary policy of the Bank of Albania has played a significant role in sustaining the upward trend of the economy and building up domestic pressures on inflation. The low policy rate, the use of the forward guidance for the markets, and the continuous liquidity injection in the interbank market have brought the private sector financing costs down, in turn, boosting consumption and investments. In parallel, the low interest rates have eased the debt servicing costs - therefore improving the soundness of the private sector balance sheets - and have attempted to decelerate the exchange rate appreciation pressures.
The financial markets appeared overall calm in the second half of the year. The interest rates on deposits and loans in the Albanian currency remain near historic lows, whereas the fluctuations in government security
yields have not been transmitted to other segments of the financial market. On the other hand, the exchange rate resulted relatively steady over the fourth quarter; its appreciation was downward compared to the high levels recorded in the third quarter.
Against this positive backdrop, lending continues to be sluggish. Excluding the exchange rate effect, the portfolio of credit to the private sector registered 5% average annual growth in the fourth quarter. In line with our previous statements, the total credit growth continues to be supported largely by the expansion of lek credit. Its portfolio recorded 7.9% average annual growth in the fourth quarter, whereas foreign currency credit grew by 2.4%.
Our analyses suggest that the slack credit growth reflects the simultaneous effect of the sluggish demand and tightened conditions from the supply side. The steady growth of lending will require the improvement of both demand and supply. In this regard, while our projections suggest demand will grow in the medium term, the Bank of Albania draws the attention to the fact that the banking sector should be more proactive in terms of its lending policies.
The banks financial soundness has been constantly improving. This performance is corroborated by the stable liquidity situation, the positive performance of profitability indicators and the progressive reduction of non-performing loans. The ratio of non-performing loans to total loans fell to 13.2% in December, reflecting the improvement of the economic activity, the effect of measures for reducing NPLs, and constant efforts by banks and firms to clean and restructure their balance sheets. In this context, the Bank of Albania believes that there is further scope for banks to factor in the reduction of the credit risk for easing their lending policies.
Our projections suggest the positive development trends will continue.
The Albanian economy will continue to grow over the medium-term horizon, underpinned by the improvement in the external environment and the favourable financing conditions at home. These factors will absorb a part of the effect from specific shocks to certain sectors and of the reduction of the fiscal stimulus during 2018. The further growth of aggregate demand and a fuller utilisation of production capacities is expected to create the necessary preconditions for the return of inflation to target around mid-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, it decided to:
Keep the policy rate unchanged at 1.25%; and,
Keep the interest rates on overnight deposits and loans at 0.25% and 2.25%, respectively.
Also, based on the available information, the Supervisory Council:
First, reconfirms that the intensity of the monetary stimulus will not diminish before the fourth quarter of 2018. Furthermore, the monetary policy is expected to remain accommodative over the medium-term horizon, to ensure a sustainable convergence of inflation with the target.
Second, finds that the balance of risks to our projections remains on the down side.
Third, emphasises once again that – beyond the cyclical dimension – the further acceleration of the economic growth pace requires a rigorous continuation of structural reforms. These reforms will contribute to enhancing the efficiency, expanding the production potentials of Albania and bolstering the resilience of the Albanian economy against potential shocks.
Dear media representatives,
Availing myself of this opportunity to communicate with the public, I would like to inform the public on a very important decision, taken today at the meeting of the Supervisory Council of the Bank of Albania. The decision relates to promoting the use of the national currency in economic and financial transactions. Known also as the de-euroisation package, this initiative is established now as a pan-national goal, in the light of the Memorandum of Cooperation signed last April. The Memorandum formalises the agreement for joint and coordinated efforts, at the national level, between three institutions: Bank of Albania, Ministry of Finance and Economy, and Albanian Financial Supervision Authority.
Before I go into further details about concrete measures, let me say a few words about this initiative.
The Bank of Albania deems that de-euroisation is a necessary and useful process in the long run, in terms of both enhancing the effectiveness of economic and financial policies and reducing the risks to the financial stability.
Our studies and analyses show that the use of foreign currencies in the domestic economic and financial ambit is relatively high. This phenomenon is related to the high use of foreign currencies in commercial transactions and as a medium for savings, in the form of deposits, or for financing, in the form of foreign currency loans.
In order to avoid any possible misunderstanding, I would like, first of all, to clarify for the public that the Bank of Albania does not intend to reduce to zero the use of foreign currencies in financial activities, but to reduce the level of euroisation to levels that are acceptable for economies of similar structure and size to our economy. What we would like to see reduced, diminished or minimised is the presence of open foreign currency positions and exchange rate risk taking, whether directly or indirectly, in an unstudied or unhedged manner, by consumers, firms and financial market agents.
Based on the above, and aiming at concretising our institutional commitment, the Supervisory Council reviewed and approved a package of decisions to promote the use of the national currency. In this regard, the following were approved:
First, the Policy Document “On the expansion of the use of the national currency in the activity of the banking sector and non-bank financial institutions, subject to regulation and supervision by the Bank of Albania”. The Document sets out the way the Bank of Albania will contribute to this process (also known as de-euroisation) and assess the impact of this contribution.
Second, some regulatory amendments, which finalise the work, carried out in the previous year for the identification, assessment and consultation with the banking industry, some measures that support the expansion of the use of the national currency in the activity of the banking sector. These regulatory amendments aim at making the foreign currency transactions in the banking sector more costly (i.e. less preferred) and promote mechanisms for raising the awareness of borrowers (especially those households that are unhedged against the exchange rate risk) on risks that accompany foreign currency borrowing. These changes will enter into force within the first half of this year.
Concluding, I would like to underline that this process requires long-term commitment; therefore, these measures may be supplemented by other measures in the future. In any case, the Bank of Albania will take action gradually and in consultation with the banking industry. In order for the process to be effective, it must be all inclusive. In this light, the Bank of Albania will maximally align its actions with other authorities that supervise the financial system and markets in Albania, and will consult with relevant European institutions.