IBNA Analizë/ The Albanian economy still has spare production capacities
The Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged, at 2.00%. In the judgement of the Council, the actual levels of the monetary stimulus are adequate for achieving the inflation target in the medium term.
Below you may find an analysis from the governor of the Bank of Albania, Gent Sejko, on the latest economic, monetary and financial developments in the country
By Gent Sejko
The Governor of the Bank of Albania
Annual inflation averaged 1.9% in the first quarter of 2015, standing higher than the previous quarter and our projections. Core inflation, which measures longer-term trends of price performance, continued to trend up in this quarter. However, the increase in first quarter inflation beyond estimates was mainly due to the rise in food prices. In the Supervisory Council’s assessment, this development reflected the reduction of the supply of fresh food products and is expected to have a temporary effect on consumer prices.
Long-term inflationary pressures from the demand side are upward; however, they remain weak. While economic activity continues to improve, the Albanian economy still has spare production capacities.
According to INSTAT data, the annual growth of the value added was 1.9% for 2014. Economic growth reflected largely the recovery of domestic private demand, and a positive contribution by public spending in the last quarter. Based on available information, the Bank of Albania estimates that the positive growth rates continued in the first quarter of 2015. Economic growth for this period is assessed to have slowed down temporarily, because of damages caused by floods on the agricultural sector and reduction of oil production, in response to the sluggish conjunctures in global markets.
Yet, economic growth for 2015 is projected to be higher than in the previous year. Economic activity is expected to be driven by the strengthening of private consumption and investments, aided by the stimulating monetary conditions and increased risk appetite in financial markets. In addition, the budget and fiscal plans for 2015 envisage a lower intensity of fiscal consolidation, which is being already noticed in the budget indicators for the first quarter of the year. The above-described situation is expected to persist in the years ahead. The expected improvements in economic activity will gradually contribute to reducing the negative output gap, until its closing in the next year.
The latest available information and our new economic projections do not change the expected medium-term trajectory of inflation. In line with the improvement of the economy, inflation is expected to rise gradually during 2015 and beyond. Inflation is expected to average around 2.2% four quarters ahead, to return then to target within a three-year horizon.
Insofar economic developments and their outlook have dictated the pursuing of an accommodative monetary policy. This policy has aimed and succeeded to lower the cost of financing the economy, to support the growth of demand and return of inflation to target. Its transmission to lower interest rates has resulted adequate, but its reflection in credit growth is slower.
Credit expansion is low, albeit the banking system is well capitalised and liquidity and profitability indicators stand at adequate levels. The sluggish credit performance reflects the weak credit demand, as well as the conservative approach by banks. The model of budget deficit financing during this year is expected to ease the terms of lending to the private sector. The shift of public borrowing from the domestic to the foreign market will create premises for further lowering of interest rates, and boosting banks’ interest to lend. Also, the expected addressing of non-performing loans through a comprehensive national platform would relieve banks’ balance sheets and improve their approach to lending. These developments are expected to materialise in better lending terms during the current year and a better transmission of the insofar monetary stimuli to economic growth.
The Supervisory Council finds that the performance of the economy is overall in line with our expectations. Due to supply-side shocks in the first quarter, inflation rates resulted higher than we expected. This gave rise to the need to revise slightly downward the expected economic growth for 2015. Their effect, however, is expected to be transitory and our assessments for the medium-term performance of inflation and of economic activity have not changed. Economic growth is expected to gradually improve in the years ahead. The Albanian economy is projected to approach its potential during 2016, which would create adequate premises for the return of inflation to target over the policy-relevant horizon.
The strengthening of aggregate demand will be the main driver of economic growth in the short and medium-term period. In the long term, however, the Bank of Albania emphasises the need for deeper structural reforms, as a pivotal instrument for generating sustainable economic growth. Structural reforms should aim at increasing the productivity of the Albanian economy and expanding the markets for our products. This will be realised, among others, through establishing a modern development infrastructure, creating a favourable business climate, and continous investment on human resources capacity building.
Based on our analysis and projections, the Supervisory Council deems that the actual monetary conditions are consistent with the achievement of the price stability objective and that the monetary policy will remain accommodative for some quarters ahead. /ibna/