Ardian Fullani: Overview of economic developments and key issues in
Albania
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, on the monetary policy
decision by the Supervisory Council of the Bank of Albania, Tirana, 20 December 2012.
* * *
Today, on 20 December 2012, the Bank of Albania's Supervisory Council reviewed and
approved the monthly Monetary Policy Report. Based on the latest monetary and economic
developments in Albania, and following the discussions on their future outlook, the Bank of
Albania's Supervisory Council decided to keep the key interest rate unchanged, at 4.00%.
The Supervisory Council deems that the current monetary conditions are adequate to meet
Bank of Albania's inflation target in the medium term. Moreover, these conditions ensure the
right monetary stimulus to support the domestic demand.
Let me now proceed with an overview of the economic developments and key issues
discussed at today's meeting.
***
Annual inflation in November stood at 2.5%. The major part of inflation continues to be
determined by the performance of food prices. Contribution of other goods was steady from
the previous month. Inflation fluctuation owed mainly to the supply-side factors, of external
and internal origin. Nonetheless, the intensity of supply shocks was low and lasted for a short
period of time. The Supervisory Council finds that developments in the real economy and
financial markets produced low inflationary pressures. The Albanian economy continues to
remain below its potential. This development is reflected in the low increase of wages and
production costs. Prices in the global markets and the exchange rate were relatively stable;
hence, they did not exercise pressures for upward prices at home. Likewise, expected
inflation remains anchored around Bank of Albania's 3% target. Finally, monetary
developments are characterised by low demand for liquid monetary assets. The monetary
policy pursued by the Bank of Albania has contributed to stimulating the aggregate demand,
administrating the liquidity in the system, and keeping inflationary expectations in check. This
situation of inflationary pressures is expected to remain steady in the medium run.
Available figures on the economic activity over the second half of the year are partial.
Indirect data analysis, however, confirm earlier estimates for positive growth during this
period, at levels similar to the second quarter of the year. Economic growth was mainly
driven by foreign demand, while domestic demand was weak.
is assessed to have been up during the third quarter, reflecting also
Consumer spending
better activity of the services sector. Private consumption, however, remains weak, due to
the slow economic performance and the perceived uncertainties about the future. Its
prospect in the medium run remains unclear. Private investments remain at low levels, in the
presence of partial utilisation of production capacities, uncertainties about foreign and
domestic demand, and tightened lending terms by the financial sector.
Public sector demand was also low during the third quarter and did not, therefore,
contribute to higher aggregate demand. As at end-October, the budget deficit for this year
was about 19.0% lower than a year earlier. The fiscal policy applied during the three first
quarters of the year materialised in the annual fall of public spending for this period, whereas
income growth was low and budget deficit was in check. On the other hand, the fourth
quarter of 2012 and year 2013 are expected to be characterised by upward fiscal spending
and budget deficit. This fiscal policy increases the macroeconomic stimulus in the short run;
however, it should be sensitive to the need for medium and long-term stability of the public
debt.
Foreign demand was the main driver of economic activity in the third quarter of the year.
Latest foreign trade data confirm the same trend for the successive period. Thus, in October,
the trade deficit continued the corrective trend, narrowing down to 10.3% in annual terms. Its
performance has reflected mainly the good performance of exports, which maintained
positive rates of their annual growth, 12.0% in this month. Imports have also contributed to
narrowing the trade deficit, contacting 2.3% in annual terms, in this month.
The analysis of monetary indicators points to low monetary pressures on prices. Higher
money supply, the M3 aggregate, continued to decelerate in October, settling at 6.2%. In
particular, lending to the private sector slowed down significantly. Annual credit growth for
the private sector was 2.4% in October, reaching its all-time low. To a large extent, it is
influenced by the low demand of households and business for loans, as reflected by the
performance of consumption and private investments. On the other hand, the banking
system continues to apply additional prudence with regard to lending, albeit it is under good
liquidity and capital conditions.
Financial markets are characterised by downward liquidity risk premiums. Interest rates in
the inter-bank market fell even further in November, reflecting the ample liquidity and eased
monetary conditions. In the primary market, government security yields continued to fall.
Moreover, the interest rate on deposits and loans denominated in the Albanian lek were
downward, in response to monetary policy signals. In the period ahead, a more
comprehensive response of the real economy to the eased monetary conditions is expected.
***
The Supervisory Council of the Bank of Albania deems that inflation will remain at low levels
and close to the medium-term inflation target of the Bank of Albania. The performance of the
domestic economy, global economy, and financial markets is not expected to generate any
deviation from the 3.0% inflation target. Under these conditions and in the absence of
unexpected shocks from the supply side, consumer prices will increase at low rates and will
range within the target of the Bank of Albania.
***
At the conclusion of discussions, the Supervisory Council decided to keep the key
interest rate unchanged, at 4.00%. Keeping the key interest rate at minimum rates helps
maintain the stimulating character of the monetary policy, thus enabling the real economy to
take advantage of better lending terms in 2013. Furthermore, this policy contributes to
keeping inflation expectations in control, by helping lower long-term interest rates.