Friday, December 19, 2014

Albania maintains rate, may cut further if risks worsen

    Albania's central bank maintained its key interest rate at 2.25 percent and expects to maintain an expansionary monetary policy as the balance of risks remain to the downside and said any worsening of risk scenarios "may require further revisions of the monetary policy stance."
    The Bank of Albania, which has cut its rate by 75 basis points this year, most recently in November, said the rise in November inflation was in line with expectations and inflation should rise gradually in coming months despite weak inflationary pressures.
   Albania's headline inflation rate rose to 1.7 percent in November from October's 1.4 percent due to higher prices of unprocessed food, medicine and rentals.

    The Bank of Albania issued the following statement:

"Today, on 18 December 2014, the Supervisory Council of the Bank of Albania reviewed and approved the Monthly Monetary Policy Report. After scrutinizing the latest domestic economic and monetary developments, and following the discussions on their expected performance in the future, the Supervisory Council decided to maintain the key interest rate unchanged at 2.25%. The Supervisory Council evaluates that the current monetary policy stance and financial conditions support the return of the economy to its potential and the gradual return of inflation to target in the medium-term period.
Inflation was 1.7% in November, up from the previous month. Inflation rose due to the higher contribution from unprocessed foods, from medicaments and from rental prices.  The other items’ contribution to annual inflation remained relatively unchanged from the previous month.
The increase of the inflation rate was in line with Bank of Albania’s expectations, but its realised rate remained on the lower bound of projections. Inflation is expected to rise gradually during the subsequent months, but the overall balance of inflationary pressures remains weak. Our economic and monetary analyses show that the stable return of inflation to target will materialise in the medium-term period.
Low inflation rates over the last quarters reflect weak pressures from both the demand and the supply side. Although edging up, domestic demand appears insufficient to fully utilise production capacities in the economy. Unutilised resources in the labour and capital markets, as well as low inflation expectations have contributed to slow growth in wages, production costs and profit margins. This dynamic is reflected in the low core inflation rates. In parallel, inflation rates in Albania's trading partners appear moderate and the transmission to the domestic market is hampered by the cyclical weakness of demand. Lastly, the current monetary expansion and the liquidity situation in the economy are in line with low inflation levels.
The Bank of Albania expects a gradual improvement of the factors contributing to inflation. In particular, economic growth and the cyclical position of the economy are expected to improve, responding also to the stimulating monetary policy we have implemented.
The economic activity is evaluated to have improved in the second half of the year, upheld mainly by the recovery of domestic demand. Following the key interest rate cut by the Bank of Albania, lending standards appear improved and have supported the increase of consumption and private investment. 
The external economic environment has not supported the growth of Albanian exports during 2014. Coupled with some structural changes in export-oriented industries, this factor has been reflected in a progressive slowdown of growth rates of Albanian exports and in an expansion of Albania's trade deficit. In annual terms, the nominal trade deficit for goods expanded by 20.4% in October. In contrast to the first half of the year, the performance of goods exports gave a negative contribution to the trade deficit enlargement. On the other hand, imports continued the upward trend that had begun in the last quarter of the previous year.
Fiscal policy pursued an overall consolidating stance throughout 2014. Until October, the budget deficit was around 31% lower than in the same period in the previous year, reflecting the rise by 12.6% of fiscal revenues and the increase by 5.1% of public expenditures. The speed of fiscal consolidation decelerated in the second half of the year and the fiscal policy was stimulatory during this period. However, in the medium term, fiscal policy is expected to remain committed to reducing the public debt.
Projections for low inflationary pressures and below-potential economic growth have guided the progressive increase of the monetary stimulus. At the end of November, the key interest rate was cut down to 2.25%. This move is already reflected in short-term interest rates in the interbank market and is expected to be reflected also in other segments of the financial market. While interest rates remain at low historical levels and liquidity conditions are stable, risk aversion of businesses, households and of the banking system still prevails. Private sector credit was up 3.5% in annual terms in October, from 2.1% in the previous month. Despite the positive trend, credit recovery remains sluggish and is not supported by solid fundamentals. Credit demand is expected to grow steadily, in line with the expected positive performance of economic activity in Albania. On the other hand, lending is expected to be also supported by the adjustment of the banking system’s balance sheets from non-performing loans, and by the financial policies of banking groups that operate in Albania. These factors will determine the credit in the next year.
Our projections suggest an upward trajectory for the Albanian economy in 2014 and in the medium-term. The economy is expected to benefit from the stimulating macroeconomic policies, the improved confidence of economic agents, and the easing of financing conditions. Within the monetary policy’s timeline of impact, the Bank of Albania expects its stimulus to be reflected in both bringing financing costs down and stimulating demand for consumption and investments in the economy. Moreover, the rigorous commitment of the government for fiscal consolidation and the completion of structural reforms in the economy should help reduce risk premia and facilitate initiatives for foreign and domestic investments in the country. 
The above projections are consistent and will require maintaining the stimulating trend of the monetary policy in the future. On the other hand, the Bank of Albania judges that the balance of risks remains on the down side. Materialisation of risk scenarios or shift of our projections on the down side may require further revisions of the monetary policy stance.

After concluding the discussions, the Supervisory Council decided to maintain the key interest rate unchanged at 2.25%. The Supervisory Council assessed that the prevailing current monetary conditions are suitable to support price stability in the medium term. Judging from the projections in the base line scenario, the Supervisory Council assesses that, to achieve the inflation target in the medium term, it is necessary that the monetary policy stance remains expansionary for the upcoming quarters.  "


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