The Bank of Albania, which lowered its rate by 25 basis points in June in response to a sharp rise in the exchange rate of the lek against the euro, added it still expects the country's economy to return to equilibrium in the second half of next year and inflation to its target in 2020.
"Maintaining the direction and intensity of the monetary stimulus boosts aggregate demand growth, contributing to growth of employment, increases of wages and build-up of domestic inflationary pressures," Governor Gent Sejko told a press conference.
Sejko added the central bank continued to monitor the exchange rate and was "ready to use the available instruments to prevent the appreciation of the exchange rate to levels that jeopardize the achievement of the inflation target."
It is the supervisory council's first policy meeting since October as the November meeting was postponed because the terms of six of its nine members had expired and the parliament had yet to vote in the replacements.
The rate cut in June halted the sharp rise in the lek seen during May and it traded sideways until October before it began rising again. Today the lek was trading at 122.8 to the euro, today, up 8.4 percent this year.
Albania's inflation rate decelerated for the fifth consecutive month in November to 1.8 percent, well below is target of 3.0 percent, plus/minus 1 percentage point, reflecting the impact of the lek's rise on higher import prices.
"Our analyses suggest that this effect is expected to be transitory and will not affect the convergence of inflation to the target in the medium term," Sejko said, adding the expectation of inflation returning to the target in 2020 is supported by the positive performance of the euro area, the stimulative effect of the monetary and financial environment in the country and an expected calming down of the exchange rate appreciation pressures.
However, Sejko added the risks to the inflation forecast are skewed to the downside due to potential external shocks and the speed of an improvement in business climate and lending.
Data suggests that economic activity in Albania trended upward in the second half of this year, supported by accommodative monetary policy, reflecting growth in industrial production and services and expansion of consumption and private investments.
"In balance, the overall context of economic and financial developments in Albania remains positive," Sejko said.
Albania's gross domestic product grew by 4.32 percent in the second quarter down from 4.46 percent in the first quarter.
The Bank of Albania issued the following statement by its governor, Gent Sejko:
"Welcome to the last press conference for 2018.
Today, the Supervisory Council was informed and discussed on the latest economic and financial developments in Albania, the outlook, the adequacy of the monetary policy stance, and other issues related to the organisation and management of the Bank of Albania.
In the following, I will present a statement of the Supervisory Council on the monetary policy decision.
Although the available information is partial and indirect, the analysed data suggest that economic activity in Albania trended upward in 2018 H2. Economic growth is reflected in the better utilisation of production capacities, as shown in the increase in employment, the decrease in the unemployment rate and the build-up in domestic inflationary pressures.
This performance has been overall in line with our previous expectations and does not bring about significant changes to our projections. Among others, it evidences the positive impact of the accommodative monetary policy of the Bank of Albania and suggests that the current stance of this policy is adequate for both ensuring economic growth rates in line with the production potential of the country and guaranteeing the convergence of inflation toward the target within 2020.
From the sectorial perspective, the expansion of the economic activity appears to reflect mainly the growth in industrial production and services. Nonetheless, available data show that the growth pace of electricity production has been slowing down in the third quarter, suggesting a slight deceleration of the economic growth rate in 2018 H2.
From the perspective of aggregate demand, the expansion of consumption and private investments and the growth in Albanian exports appeared to have continued to underpin economic growth. On the other hand, the fiscal policy consolidation in the third quarter and most of the fourth quarter has been stronger than expected, driving thus to a slower-than-projected contribution to economic growth by public expenditure.
In balance, the overall context of economic and financial developments in Albania remains positive.
The Albanian economy continued to benefit from the positive performance of our main trading partner, the euro area, from the improving financial balances of households and firms, and from the fiscal consolidation, which has reduced the risk premia in the domestic financial markets.
In parallel to these factors, economic activity expanded, supported by the accommodative monetary policy of the Bank of Albania. The monetary policy has been transmitted through the low policy rate, the continuous injection of liquidity into the domestic financial market, the forward guidance instrument, and selective interventions in the foreign exchange market during the summer period.
Our monetary stimulus has created a liquid financial environment with low interest rates, and has mitigated the effect of appreciation pressures on the exchange rate. The low interest rates have supported the expansion of credit: excluding the effect of the exchange rate and the lost loan write off, credit to the private sector increased by 4.9% and 4.5% in the third quarter and in the first two months of the fourth quarter, respectively. The low interest rates have also helped in restructuring loans, easing the debt servicing costs and improving the financial system stability. The NPL ratio dropped to 12.7% in November, illustrating thus the continuous improvement in the banking sector soundness. Lastly, the temporary intervention in the foreign exchange markets has reduced misbalances in the supply and demand for foreign currency, calming down the foreign exchange market functioning and reducing exchange rate deviations from the levels suggested by fundamental factors.
The growth of credit, the easing of the borrowers’ financial burden, and the reduction of exchange rate volatilities have encouraged consumption, investments, economic growth and employment gains, creating thus premises for the return of inflation to target in the medium-term horizon.
Inflation stood at 1.8% in November, downward from the level registered in the third quarter and in October. In line with our previous expectations, this fall reflects the downward effect from the appreciation of the exchange rate on imported inflation. Our analyses suggest that this effect is expected to be transitory and will not affect the convergence of inflation to the target in medium term.
The update of forecasts in accordance with the baseline scenario confirmed our previous expectations on the return of the economy to equilibrium in the second half of the next year and of inflation to target in 2020. This performance is expected to be supported by the positive performance of the euro area and other trading and financial partners, the stimulating monetary and financial environment in Albania and the calming down of exchange rate appreciation pressures.
In parallel with it, the Supervisory Council deemed that the balance of risks remains skewed to the downside. These risks are related to both potential shocks that may come from the external environment, and the speed of improvement of the business climate and of lending in Albania.
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Judging on the above, the Supervisory Council of the Bank of Albania deemed that the current monetary policy stance remains adequate.
Taking into account these circumstances, the Supervisory Council decided to:
- Keep the policy rate unchanged, at 1.0%;
- Keep the overnight deposit and overnight lending rates, unchanged at 0.1% and 1.9%, respectively.
Maintaining the direction and intensity of the monetary stimulus boosts aggregate demand growth, contributing to growth of employment, increase of wages and build-up of domestic inflationary pressures.
In accordance with projections of the baseline scenario, and based on the available information, the Supervisory Council judged that a rise in the policy rate will not resume before the second quarter of 2019.
Moreover, the Bank of Albania will continue to monitor the performance of the exchange rate and remains ready to use the available instruments to prevent the appreciation of the exchange rate to levels that jeopardise the achievement of the inflation target."
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