Gent Sejko: Overview of Albania's latest monetary and economic
developments and outlook
Speech by Mr Gent Sejko, Governor of the Bank of Albania, on the Monetary Policy Decision
of the Bank of Albania's Supervisory Council, Tirana, 4 March 2015.
* * *
Today, on the 4 of March 2015, the Supervisory Council of the Bank of Albania reviewed and
approved the Interim Monetary Policy Report. After scrutinising the current and expected
performance of inflation and other economic indicators, the Supervisory Council of the Bank
of Albania decided to keep the key interest rate unchanged at 2.0%.
***
The domestic and external economic environment has generated low inflationary
pressures.
According to INSTAT data, annual inflation was 1.3% in January, up from the rate registered
in December. Inflation fluctuations in the last two months have been determined mainly by
the volatility in food prices. The fall in food inflation in December and its rise in January were
driven by developments in international markets and the performance of domestic
production. In parallel, the decline in oil prices has generated downward pressure on
inflation. Prices of other consumer goods' categories did not display any significant change.
The rise in inflation in January was in line with our projections; however, the rate of inflation
remains below Bank of Albania's target.
The Bank of Albania evaluates that inflationary pressures will increase gradually and
inflation will return to target within the medium term. However, Bank of Albania
evaluates that inflation will remain below the target for the most of this period. Its
performance will continue to be determined by the degree of recovery in economic
growth, supply-side domestic and external shocks, and economic and financial
agents' inflation expectations.
The Albanian economy is assessed to have improved in 2014. According to INSTAT data,
the economic activity grew by 1.4% during the first nine months of the year. We expect the
growth rate to accelerate in the fourth quarter, driven by the strong fiscal stimulus in this
period.
Due to damages caused by floods in the south of the country, our projections on the
performance of the economy during 2015 are revised slightly downwards. However, their
effect is expected to be temporary and the economy is projected to remain in an upward
trend in the medium term. Economic growth for 2015 is projected to be higher than that in the
previous year. The expansion of economic activity will continue to be driven, to a large
extent, by private sector growth. Foreign demand is expected to play a small positive role
and the speed of fiscal consolidation is expected to be reduced.
While upward, our projections suggest that the economic activity at home will remain below
its potential in 2015, generating incomplete utilisation of production capacities. Incomplete
capacity utilisation is underpinned by a relatively high unemployment rate and is reflected in
low pressures on wage increases and production costs. In parallel, the weak aggregate
demand does not allow for the increase in businesses profit margins. In the medium term,
the expected improvement in economic growth will bring the economy back to equilibrium
and will increase demand-side inflationary pressures.
From the supply side, the decline in food and commodity prices in global markets and the
increase of domestic agricultural production are expected to exercise downward pressures
on inflation during 2015. However, their negative impact on inflation is expected to phase out
in the coming years.
Inflation expectations will have a similar direction of their impact. In the short term, economic
agents expect low inflation rates. This projection does not encourage the growth of
consumption and of investments. Moreover, it tends to be factorised in low prices in future
contracts between economic agents. Inflation expectations will shift upward, as inflation
rises.
Considering the above arguments, the Bank of Albania estimates that - with a high
probability of occurrence - inflation will range 1.8-4.4% four quarters ahead.
The balance of risks to the inflation projections remains on the down side. Downward
risk factors to the inflation projections are slower economic growth, stronger decline of global
prices and materialisation of second-round effects from lower oil prices at home. On the
other hand, a factor that may contribute to a faster increase in inflation in the future is the
increase in prices of agricultural products as a result of damages to agricultural land from
recent floods.
In line with these assessments, the monetary policy should remain stimulating in the
period ahead. The monetary stimulus will support the recovery of domestic demand
and ensure the return of inflation to target.
In January, the Bank of Albania lowered its key interest rate to 2.0% and signalled the
continuation of this monetary policy trend for some quarters ahead. The monetary stimulus
increased progressively through the lowering of the key interest rate, through the
continuation of eased conditions of liquidity injecting operations, and through forward
guidance to the public. This policy is aimed at cutting the costs of lending to the economy
with the ultimate goal supporting demand growth and return of the economy to equilibrium. It
has also signalled the commitment of the Bank of Albania to comply with its inflation target.
Taking into consideration the time lag, the structural problems and the various shocks
on financial markets and economic activity, the transmission of the monetary policy
has been adequate, but not yet complete.
The monetary stimulus has been transmitted to the financial markets, but the response of the
economy to better lending terms continues to remain weak. The accommodative monetary
policy is reflected in lower interest rates for lek loans and has contributed to the constant
growth of this loan's portfolio. Credit expansion, however, remains low as a result of the
sluggish demand for credit and banks' conservative lending policies. The Bank of Albania
asserts that the financial markets and agents have sound and liquid balance sheets, but they
continue to be risk averse into undertaking long-term investments.
In conclusion, the Supervisory Council decided that the actual monetary policy stance
is appropriate and decided to keep the key interest rate unchanged at 2.0%. The new
information analysed at the meeting does not change our evaluations for the current situation
of the economy and financial markets, and expectations for their outlook. The current
monetary conditions are adequate for ensuring the return of inflation to our 3.0 % target in
the medium term. Judging from the expected developments and the balance of risks
surrounding them, the Supervisory Council deems that the monetary policy of the Bank of
Albania will continue to maintain its stimulating nature, for some quarters ahead.