The Bank of Albania, which has cut its rate by 50 basis points this year, issued the following brief statement:
"Today, on 24 September 2014, the Supervisory Council of the Bank of Albania reviewed and approved the monthly Monetary Policy Report. Based on the most recent economic and monetary developments, and following the discussions on the expected outlook, the Supervisory Council decided to keep the key interest rate unchanged, at 2.50%."
Later the central bank's supervisory council issued the following statement:
"Today, on 24 September 2014, the Supervisory Council of the Bank of Albania reviewed and approved the monthly Monetary Policy Report. After discussions on the recent economic and monetary developments in Albania and their outlook, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged, at 2.50%. The Supervisory Council deems that the monetary policy stance and current financial conditions are adequate to ensure the return of the inflation to target in the medium term.
Annual consumer prices inflation rate was 2.0% in August, up for the second consecutive month. The rise in inflation in the past two months is in line with our expectations for its gradual convergence towards the 3.0% target. Over the period, however, inflation increased also due to the statistical effect of low prices in the previous year. This effect is expected to be more moderate in the coming months. Hence, the Supervisory Council deems that inflation’s pace of return to target will be slower than the one suggested by the dynamics in the past two months.
In the structural aspect, food prices, especially those of agricultural products, continue to dictate the rate of inflation. Other consumer goods and services provided a low positive contribution to inflation.
In the macroeconomic aspect, low inflation rates continue to be determined by low pressures, from both the demand and supply side. The Albanian economy continues to be characterised by spare production capacity, generating low pressures on wage growth and production costs. Moreover, imported inflation is low, because of downward commodity prices, low inflation rates in Albania's trading partners, and stable exchange rate. In parallel, inflation expectations and monetary indicators have performed in line with the low increase of prices in the economy.
The incoming information, which was analysed at the meeting, about the developments in the real sector of the economy is scarce. However, the analysis of available indicators suggests that economic growth remains in positive territory and that there are signs of recovery in the second and third quarters.
Economic growth was driven by the better performance of domestic private demand. Private consumption and investments edged up, reflecting the improved confidence of households and businesses, better credit conditions in financial markets, and stronger balance sheets in the economy. However, private consumption and investments performance remains weak, contingent on sustainable improvements in the labour market, a better performance of the global economy, and solid growth of funding resources, including foreign direct investments and bank lending. In the period ahead, the transmission of the stimulating monetary policy stance to the financial markets as well as the expected reduction of risk premiums are expected to be reflected in better financing conditions of Albanian businesses and households.
Foreign demand continued to drive economic growth in the second quarter. Albanian exports fell slightly in annual terms in July, but available information suggests that the fall is temporary. The trajectory of exports of goods and services is expected to be upward in the medium term and their contribution to aggregate demand growth is expected to increase.
Fiscal policy was characterised by consolidation during 2014. However, data for the last two months show that the intensity of fiscal consolidation and the direct deceleration impact on aggregate demand are diminishing. Expected developments in budget indicators for the rest of the year are expected to be translated into positive fiscal stimuli. July and August were characterised by higher budget expenditures, leading the annual growth of expenditures back to positive territory. On the other hand, fiscal revenues continue to show high annual growth rates. As a result of these developments, the budget deficit expanded in August, but it stands 50% lower than the planned level for this period. The Bank of Albania supports the consolidating medium and long-term trajectory of the fiscal policy. In our view, however, budget items should be distributed more uniformly throughout the year, in order to reduce volatility in the economy and the financial markets and to enhance the efficiency of expenditures.
In response to the monetary policy direction, financial markets were characterised by historically low interest rates. The implementation of the accommodative monetary policy has helped ease borrowing costs for the banking system and transmit them to other segments in the financial markets. Interbank rates for Albanian lek deposits and short-term segment of government securities settled at low levels, whereas the long-term segment of government securities appears more volatile. In July, the interest rate on lek credit fell for both businesses and households, and the exchange rate was relatively stable.
The improved performance of economic activity and financial markets is reflected in a faster expansion of monetary indicators. The annual growth of money supply surged to 2.1% in July, from 1.0% a month earlier. Credit to the private sector improved for the third consecutive month, confirming the signals received from business, consumer and bank surveys for a gradual recovery of credit. The annual growth of the credit portfolio shifted to positive levels, 0.5% in July, driven by credit in the national currency, while the portfolio of foreign currency credit continues to shrink.
The Supervisory Council concluded that the newly available information is in line with our expectations and does not change our assessments and baseline projections. The Albanian economy is expected to grow gradually towards its potential in the medium term, thus contributing to inflation's return to target. In particular, a more effective transmission of the monetary stimuli, reduction of risk premiums in international markets, payment of arrears to the private sector and improvement of the economic sentiment contribute to rendering a more favourable setting for investments and increasing bank lending.
At the end of the discussions, the Supervisory Council decided to keep the key interest rate unchanged, at 2.50%. Based on available inflation and in line with our projections, the Supervisory Council deems that the stable return of inflation to target will require keeping the key interest rate low for some quarters ahead."