Ardian Fullani: Recent economic and monetary developments in Albania
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on
the Monetary Policy Decision of the Bank of Albania Supervisory Council, Tirana,
29 May 2012.
* * *
Today, on 29 May 2012, the Supervisory Council of the Bank of Albania reviewed and
approved the monthly Monetary Policy Report. Based on the analysis of Albania's latest
economic and monetary developments, and following discussions on their performance
outlook, the Supervisory Council of the Bank of Albania decided to keep the key interest rate
unchanged at 4.25%. This decision reflects the Supervisory Council's opinion that the actual
monetary conditions are adequate to meet the Bank of Albania's inflation target in the
medium run. It holds the key interest rate at a record low, thereby maintaining the strong
stimulating nature of monetary policy, in order to boost aggregate demand and economic
growth. This decision also reflects the heightened uncertainty deriving from the external
economic environment and, particularly, from the recent economic developments in Greece.
Let me now proceed with an overview of the economic developments and key topics
discussed at today's meeting.
***
Annual inflation marked 1.6% in April, continuing to pursue an upward trajectory over the last
two months and approaching the lower limit of the target band. After marking a minimum low
in February, the rising trend of inflation was expected and communicated by the Bank of
Albania. It reflects, to a large extent, the gradually subsiding supply-side shocks on inflation.
The decelerated rise in primary commodity prices in the global markets, the low inflation in
Albania's trading partners and the stable exchange rate have generated reduced imported
inflation rates.
However, despite increasing, inflation remains low due to the incomplete utilisation of
capacities in the economy, which is reflected in weak pressures on the rise of wages and
producer prices. At the same time, economic agents' inflation expectations are low and
growth of money is in line with the demand of the economy for money. In addition, the absent
rise in regulated prices has contributed to the low inflation rate over 2012.
While making an analysis of the economic developments, the Supervisory Council noted that
the reappearance of stress in the global financial markets in the current month has
heightened the uncertainties in these markets markedly, being translated into more strained
financing conditions for the public and private sector. The fall of foreign demand and the
higher perceived risk for the entire area have started to affect the performance of economic
activity in the countries of the region.
The statistical information available for the first quarter of 2012 provides evidence for a
sluggish economic activity. This performance, among others, has been also affected by
temporary factors arising from the severe weather conditions. However, the analysis of
available indicators reaches the conclusion that both domestic and foreign demand remain
sluggish.
After recovering in the last quarter of 2011, private consumption slowed down in the first
quarter of 2012. The performance of imports of consumer goods and the low annual growth
of VAT revenues suggest sluggish consumer demand over the quarter under review. This
assessment is also supported by qualitative data obtained from consumer, business and
banking sector surveys. The dynamic of quantitative and qualitative indicators also suggests
a sluggish performance of investment.
Against a background of low demand and spare production capacities, and in the presence
of uncertainties for the developments at home and abroad, businesses have postponed their
new investment-related decisions. In addition, the contribution of public investment to
aggregate demand growth was negative in the first quarter of 2012.
The Government pursued a prudent fiscal policy in the first four months of the present year,
translated into the annual reduction of the budget deficit by 28% during this period. Budget
revenues continue to record moderate annual growth rates, reflecting the performance of
economic activity and providing evidence for the mutual impact between the public and
private sector dynamics. The Bank of Albania, however, points out that pursuing a fiscal
policy oriented toward the long-term sustainability of budget and public debt figures will
provide clear medium- and long-term benefits to the Albanian economy, in the form of lower
risk premiums, greater room for private sector financing and, ultimately, lower financing
costs. This policy is also in line with the developments in domestic and foreign financial
markets.
Foreign demand continued to contribute to the expansion of the economy in the first quarter
of 2012, albeit to a markedly lower extent. The sluggish increase in exports remains a
concern as long as it affects the performance of the economy during 2012. It also provides
evidence for Albania's strong reliance on certain geographical markets or products.
The analysis of monetary data suggests that the performance of monetary indicators was in
line with the developments in the real economy. Money supply maintained the growth rate of
end-2011, recording in March an annualized growth of 8.8%. Our analyses suggest that its
growth is in line with the demand of the economy for real money, signalling contained
monetary inflationary pressures in the medium run. Lending to the private sector recorded an
annual growth of 9.0% in March. Its performance, particularly in the recent months, was
determined by the low private sector demand for credit and the cautious bank lending
behaviour.
Financial markets were liquid and stable. Interbank market rates dropped significantly in April
and the trading volume in this market increased. The pass-through of easing monetary policy
signals persisted in the lek deposit market as well, as reflected by the lower interest rates.
Government security yields in the primary market remained at similar levels to the previous
month. Their increase in the first quarter of 2012 reflects the developments in supply and
demand-side structural factors, hence signalling no added inflation premiums. Interest rates
on lek-denominated loans did not fully respond to the easing monetary policy signals due to
the higher credit risk premiums in particular branches of the economy.
New information supports our previous projection that the GDP growth will remain below its
potential in the quarters ahead, owing to the moderate contribution of foreign demand, lack of
fiscal stimulus and sluggish domestic demand. The two main components of the latter,
consumption and private investment, remain slow. The incomplete utilisation of capacities,
coupled with the slow rise in wages and unit labour costs, are expected to exert contained
inflationary pressures in the period ahead.
Economic agents' inflation expectations are anchored close to the target. They, however,
may be subject to the response to global developments in the short run. The gradually
subsiding supply-side shocks in the period ahead, the termination of base effects' impact and
the extended effect of the Bank of Albania's stimulating policy are expected to be followed by
an rising inflation trend, thereby approaching the Bank of Albania's target in the medium run.
The Bank of Albania has continuously eased the monetary policy in the recent months,
aiming at meeting the inflation target in the medium run, and keeping the inflation
expectations and risk premiums in the economy under control. This policy has aimed at
responding to a situation where the main obstacle to the recovery of private sector demand
and foreign direct investment relates to the uncertainty for the future and approach to risk, in
the short and medium run. We consider that the provision of a cautious monetary stimulus,
conditioned by the control of risk premiums and safeguard of financial stability, is major
contribution the Bank of Albania can make to the stable and long-term economic growth in
Albania.
***
Based on the analysis of the information set out above, the Supervisory Council holds that
the risks around the expected inflation trajectory remain balanced. On the demand-side,
below-potential economic growth will continue to generate low inflationary pressures, while
supply-side shocks are also expected to remain contained. At the end of discussions, the
Supervisory Council decided to keep the key interest rate unchanged at 4.25%. This
decision aims to create adequate monetary conditions for meeting the inflation target in the
medium run. It also provides proper support to boost aggregate demand.