At today’s meeting, the Supervisory Council of the Bank of Albania reviewed and approved the Quarterly Monetary Policy Report. After being acquainted with the analysis of economic and monetary developments, the Supervisory Council discussed their expected future performance in the future. In conclusion, the Supervisory Council found that the current monetary policy stance remains adequate and decided to keep the key interest rate unchanged.
Let me go into more detail in reflecting our conclusions and in explaining the monetary policy decision.
The new information analyzed in this Report suggests that the Albanian economy continues to maintain a positive development trend. Economic activity continues to expand, inflation has been increasing, while monetary and financial conditions remain generally appropriate for meeting our inflation target within a medium-term horizon.
Inflation marked an average rate of 1.9% in the first quarter of 2018, recording a slight increase from the value of the previous quarter. Inflation growth mainly reflected higher rental prices, while food prices continued to fluctuate and inflation of other basket items relatively low and stable.
In a broader perspective, inflation growth was favored by aggregate demand and internal inflationary pressures, but continued to be curbed by lower inflation rates in partner countries and by strengthening appreciation of the exchange rate.
According to INSTAT data, the Albanian economy grew by 3.4% in the last quarter of last year. Available indirect data suggests that a similar growth rate was maintained in the first quarter of the current year.
The expansion of economic activity is largely supported by increased consumer spending and private investment. By contrast, the fiscal stimulus has been reduced during this period, while the foreign trade deficit has expanded. Growth in aggregate demand is mainly reflected in the growth of the services sector and certain branches of the industry sector.
In macroeconomic terms, growth is driven by improved private sector confidence, increased foreign demand and high levels of FDI, as well as favorable financing conditions in the country.
The expansion of economic activity has led to a better utilization of production capacities. It is reflected in further employment growth, falling unemployment rates, and improving the financial balances of Albanian businesses. However, economic activity in the country continues to remain below its potential level, which curbs wage growth and production costs.
The stimulating monetary policy of the Bank of Albania has been and remains an important supporting factor for the development of the country. In response to this policy, financial markets continue to be characterized by low interest rates, a good liquidity position and reduced risk premiums.
The banking sector continues to record adequate levels and improve asset quality indicators, liquidity, profitability and capitalization. Credit to the economy grew on average by 3.3% in the first quarter of the year, fueled by the 7% increase in the ALL loan portfolio. The Bank of Albania notes that the expected growth of financing needs needs to be accompanied by more realistic and flexible lending policies from the banking sector, so as not to condition the dynamics of future development.
A prominent development of financial markets has also been the strengthening of the exchange rate trend.
Concerning this phenomenon and in line with our previous positions, the Bank of Albania notes that the medium-term exchange rate strengthening trend, starting from the second half of 2015, reflects the action of key factors. These factors are materialized in the increase of foreign currency supply due to the improvement of the current account deficit, high levels of foreign direct investment and the reduction of risk premiums in the domestic financial market.
On the other hand, the relatively rapid strengthening of the exchange rate over the last two months has reflected the action of specific foreign exchange market factors. This performance does not reflect the direct effects or the objectives of our strategy to promote the use of national currency. As such, it is expected and estimated to be short-term.
In line with the established trends and our conclusions on the determinants of development, the update of medium-term projections reconfirmed our previous expectations. The Albanian economy is expected to continue to grow in the medium term, driven by stimulating financing conditions and by the expected improvement of the foreign environment. Increased use of manufacturing capacities will create premises for strengthening domestic inflationary pressures, bringing them in line with our inflation target. Strengthening these pressures is expected to be sufficient to offset the rapid and temporary strengthening of the exchange rate.
In line with these estimates, the Bank of Albania expects inflation stabilization in current rates in 2018 and a gradual increase in 2019. Our projections suggest that inflation will return to the target within the next year.
Judging above, the Supervisory Council decided:
- Keep the key interest rate unchanged at 1.25%;
- Keep unchanged deposit and overnight interest rates, respectively at 0.25% and 2.25%.
Compared to our previous estimates, the Supervisory Council judges that meeting the inflation target will require a more accommodating monetary policy in the medium term. Based on the current information available, the Supervisory Council estimates that the intensity of the monetary stimulus will not decrease before the second quarter of 2019.
Also, the Bank of Albania’s Supervisory Council found that the balance of inflation risks is further shifted downstream. In these circumstances, if the intensity and duration of the restraining factors for the return of inflation to the target will be stronger than our current estimates, the Bank of Albania remains willing to react, through available instruments and in accordance with the policy regime cash.
News Source: Bank of Albania