The Bank of Albania, which has cut its rate by 50 basis points this year following cuts in May and April, added that its medium-term projections had not changed and its monetary stimulus was still expected to remain unchanged over 2016.
Economic activity in Albania is forecast to improve progressively with the economy returning to equilibrium in the second half of next year, creating the conditions for inflation to return to the central bank's target in the second half of 2018.
Albania's economy grew by a higher-than-expected annual rate of 3.0 percent in the first quarter, up from 2.15 percent in the previous quarter, reflecting improved activity in services and construction while activity in industry and agriculture continued to contract.
"Indirect available indicators suggest similar growth rates even in the second quarter," the central bank's governor, Gent Sejko, said in a statement.
Albania's inflation rate rose to 1.2 percent in June from 0.7 percent in May, well below the central bank's target of 3.0 percent, plus/minus 1 percentage point.
In May the central bank forecast that inflation would be around 1.9 percent by the end of 2016.
The Bank of Albania released the following statement by its governor, Gent Sejko:
"In the meeting held on 3 August 2016, the Supervisory Council of the Bank of Albania reviewed the Monetary Policy Report for the second quarter. At the conclusion of the discussions on the presented projections and analyses, the Supervisory Council decided to keep the key interest rate unchanged, at 1.25%. Moreover, the Supervisory Council decided to keep unchanged the interest rates on overnight deposits and credit facilities, at 0.25% and 2.25%, respectively.
The Albanian economy and financial markets have performed overall in line with our expectations. Economic activity expanded in the first half of the year, inflation showed upward trends in the second quarter, and the accommodative monetary policy stance provided for a liquid financial environment with low interest rates.
Against this backdrop, our medium-term projections have not changed and the actual monetary policy stance is assessed as adequate for complying with the price stability objective in the medium-term horizon.
Inflation recorded progressive increase in the second quarter. At the end of June, annual inflation increased to 1.2%, mainly attributable to the rise in food and rent prices.
In macroeconomic terms, inflation returned to an upward trajectory driven by the reduction of foreign disinflationary pressures and strengthening of domestic pressures. This trend confirms our assessments for the transitory effect of supply-side shocks that led to the fall in this indicator during the first quarter. It also reflects the improvement of the economic activity in Albania.
Economic growth in the first quarter resulted in the up side of our expectations. According to INSTAT data, the Albanian economy recorded 2.96% annual growth in first quarter of the year. The growth reflects the improved activity in services and construction, while the activity in industry and agriculture continued to fall. Indirect available indicators suggest similar growth rates even in the second quarter.
Economic growth for the first half of the year reflected the combined effects of the accommodative monetary policy and consolidating fiscal policy implemented in Albania. Economic activity expanded as a result of the increase in private domestic consumption and investments. Their growth reflects the improvement of firms and households financial balances, positive developments in the labour market, reduced uncertainties and the resurgence of the construction market. The monetary stimulus and improvement of financing conditions also contributed to this performance. On the other hand, trade with abroad and public sector activity did not favour economic growth. Our exports continue to suffer from the unfavourable price conjuncture in international commodity markets, but this factor was offset somewhat by the improvement in tourism. Moreover, the fiscal policy maintains the consolidation stance, with a higher intensity than the planned level.
In view of the trends evidenced in the first half of the year and the financial conditions of the economy, economic growth and expected inflation during 2016 were revised slightly upward.
Financial markets appear calm, with low interest rates and ample liquidity. The monetary stimulus pass-through to these markets is reflected in lower financing costs for the Albanian economy. Interests rates hit new historic minimum levels across the entire spectrum of financial instruments, over the second quarter. The accommodative monetary policy stance has brought down costs for financing consumption and investments, and has eased the costs of servicing credit and debt, without generating negative consequences for the financial system's soundness indicators. In particular, banking sector's liquidity and capitalisation maintain adequate levels.
Credit performance showed trends of improvement in the second quarter. Cleaned from the write off effects, the bank credit portfolio recorded around 3% annual growth, on average. This performance owes largely to the annual expansion by 6.4% of lek credit, while the portfolio of foreign currency credit remained almost unchanged from the previous year.
Yet, its annual growth rates remain sluggish. The sluggish credit growth continues to reflect both the low demand and the tight supply for this product. The Bank of Albania deems that the bolstering of demand and the further improvement of supply for credit remains a precondition for steady medium-term and long-term growth in Albania. For that reason, the complete implementation of the action plan for the treatment of non-performing loans is pivotal. For the same-stated reason, we welcome the justice reform and deem that - among others - it will pave the way for a more transparent and reliable legal setting for the commitment of parties in long-term contracts.
The new available information and update of analyses have not produced any significant changes to our medium-term forecasts. In this horizon, we expect economic activity to improve progressively, reflecting also the favourable financing conditions. The Albanian economy is expected to return to equilibrium in the second half of 2017, which would create premises for the return of inflation to target in the second half of 2018.
These forecasts are conditioned by the fact of maintaining the stimulating monetary policy over this period. The monetary stimulus is expected to remain unchanged over 2016.
The balance of risks remains on the down side. It is further reinforced by, direct or indirect, potential Brexit implications for the economy and financial system in Albania.
The Bank of Albania judges that the positive trajectory of economic and financial developments will be maintained in the period ahead. In any case, our monetary policy stance will be in line with our inflation target and the need for further consolidation of sources of economic growth."