The Bank of Albania, which has cut its rate by 50 basis points this year, added that the country's economy is continuing to improve and inflation is gradually moving toward the target as financial markets remain calm and financing costs at their lowest historical levels amid improved confidence and an easing of external shocks.
The central bank added its medium-term projections for growth and inflation had not changed in the latest update, with private consumption and investments still seen driving economic growth, helping return economic activity to return to equilibrium over next year.
With economic activity improving and a stabilization of the external environment, inflation should reach 2.3 percent four quarters ahead and return to target over 2018.
The Bank of Albania targets inflation of 3.0 percent, plus/minus 1 percentage point.
Albania's inflation rate eased to 1.5 percent in October from 1.8 percent in September but an expected rise in inflation during the second half of this year "reflects the strengthening of inflationary pressures from the domestic demand and the reduction of disinflationary pressures from abroad."
Albania's economy grew by an annual rate of 3.2 percent in the second quarter of this year from 3.1 percent in the first quarter, with expanding activity helping improve employment and paving the way for an increase in wages and production costs, sustaining an upward trend in inflation.
The latest data "suggest that the economic growth in the third and fourth quarters will remain at similar rates," the central bank said.
The Bank of Albania issued the following statement:
"The Albanian economy continued to improve over the last two quarters. Economic activity grew progressively. Inflation is gradually moving towards the target, while financial markets remain calm and financing costs remain at their lowest historical levels. These tendencies reflect the Bank of Albania's accommodative monetary policy stance, the improved confidence in the economy and eased shocks from the external environment.
The new information analysed in this monetary policy report has resulted, overall, in line with our expectations.
In this updated round of medium-term projections expected trajectories of economic growth and inflation have not changed.
Against this backdrop, the Supervisory Council estimates that the current monetary policy stance is adequate to meet our objective.
In the third quarter, inflation averaged 1.9%, up compared to the low values recorded in the previous two quarters. Inflation fell at 1.5% in October. The increase of inflation during the third quarter and its fall in October were affected by the inflation fluctuations of food and oil.
The rise in inflation during the second half of year reflects the strengthening of inflationary pressures from the domestic demand and the reduction of disinflationary pressures from abroad. The expansion of economic activity in Albania drove to the increase of employment and decrease of unemployment. The gradual shift of economy towards equilibrium paves the way for an increase in wages and production costs in the medium-term horizon. These trends sustain the upward trend in core inflation. On the other hand, as expected, the impact of external shocks on inflation has declined and imported disinflationary pressures have subdued. These factors have affected and are expected to continue to support the upward trend in inflation in the medium term.
INSTAT data for the second quarter of the year indicated the Albanian economy had grown at 3.2% annually. Available data suggest that the economic growth in the third and fourth quarters will remain at similar rates.
In terms of sectorial contribution, economic growth reflected expanded activity in services, mainly due to a good performance during the tourism season. On the other hand, the production sector –which consists of industry, construction and agriculture - was almost at the same level as in the previous year.
On the aggregate demand side, economic growth was driven by the strengthening of domestic demand, in response to improved household consumption, whereas foreign trade provided a high negative contribution.
Consumption and private investments were the components with the highest effect on economic growth. They expanded as a result of improved confidence, increased employment, higher capacity utilization rates, and higher FDIs' inflows. In parallel, the accommodative monetary policy stance has created the optimal conditions to stimulate consumption and to finance investments.
On the other hand, the expanded domestic demand has been accompanied by a rapid growth of imports. Due to unfavourable conjunctures in international markets for our products, this growth was not offset by a simultaneous expansion in exports, despite higher tourism revenues. As a result, foreign trade activity contributed negatively to economic growth in the second quarter.
Finally, fiscal policy continues to consolidate, leading to a budget surplus of around ALL 10.6 billion until September. The completion of public spending according to the budget deficit plan for 2016, suggests that the contracting impact of fiscal consolidation on economic growth will be lower in the last quarter. Nevertheless, the Bank of Albania evaluates that in the future, a more evenly distributed borrowing and deficit would improve the effectiveness of public finances and would reduce the economic and financial volatilities they generate.
This new round of medium-term projections has confirmed our previous expectations.
The Bank of Albania estimates that economic activity in Albania will continue to grow during this period and will return to equilibrium over 2017. Private consumption and investments will drive economic growth. On the contrary, foreign trade is expected to have a secondary role in growth and fiscal policy is expected to remain consolidated.
The return of the economy to equilibrium and the stabilisation of the external environment will establish the conditions for a progressive increase of inflation in the medium term. Annual inflation is expected to reach 2.3% four quarters ahead and return to target over 2018.
Taking into account the expected fiscal consolidation, these forecasts are conditional on a consistent implementation of an accommodative monetary policy over this period.
Our monetary stimulus, transmitted through the policy rate cut, through a continuous injection of liquidity and through forward guidance, has led to a considerable decrease in financing costs in financial markets. The interest rates on loans in lek stand at an historical minimum level, favouring a stable growth in the credit portfolio in lek. Excluding the effect of write offs from balance sheets, the annual increase of this portfolio was about 8.2% at the end of September. This portfolio had the highest share in the growth of total credit portfolio. Total credit to private sector recorded an annual growth of 3.3% as at end of September. In parallel, low interest rates ease the existing debt’s servicing costs, help improve the real sector balance sheets’ and favour the further improvement of consumption and investments.
The low interest rates and the liquid and well-capitalised banking system are positive premises for the growth of credit and the financing of economic growth. Nevertheless, banks’ lending policies remain conservative, due to the tightening of supervisory and regulatory measures at the European level, and the perception of high credit risk in Albania. For that reason, the Bank of Albania welcomes the insofar implemented measures and believes that a complete and timely implementation of the Action plan for reducing non-performing loans will significantly improve the financial environment in the country.
In addition to the implementation of the other levels of the current structural reform packages, these measures will help fulfil our medium-term objectives and further expand Albania's economic growth potential.
Based on the above analysis and forecasts, the Supervisory Council estimates that the current monetary policy stance is adequate to meet our inflation target.
Against this backdrop, the Supervisory Council decided to:
- keep the policy rate unchanged at 1.25%;
- keep the rates for the overnight deposit and loan facilities unchanged at 0.25% and 2.25%, respectively.
Furthermore, based on the available information on the expected developments and risk about them, the Supervisory Council assesses that the intensity of the monetary stimulus will not diminish prior to the second half of 2017."