TIRANA, Nov.27- The supervisory council of BoA met Tuesday in order to discuss the macroeconomic situation in Albania and issue important decisions that affect the business climate as well as the economic indicator. First the issue of inflation was addressed which according to calculations for October was 4.2 percent and for the last three months it has been above 4 percent while the target rate of BoA is 3 percent. The meeting explained that the inflation pressure comes from the supply side mainly.
Monetary developments have followed credit developments in the economy which have been generally rising in a stable way, above 50 percent. Fiscal balance has a liquidity surplus. Credit portfolio has expanded by 52 percent annually with business loans up by 44 percent and individual loans by 68 percent.
A strong local currency
The interest rate on lek has gone up reflecting the monetary policies of the bank. The banking system has operated in conditions of limited liquidity prompting the bank to inject liquidity in the short term through inverse repurchase bids in the open market. During October 3 billion lek were injected with an interest rate 6.3 percent. Yields on all T-bills for all sorts of maturity terms have also increased. Lek deposits are more attractive now since interest on them is up by 0.84 percent. Lek has gained ground in comparison to foreign currencies, both euro and dollar. The respective strengthening has been 3.6 percent towards the dollar and 1.2 percent towards the euro. The overvaluing of lek toward the dollar has been conditioned by developments in the international markets where the American currency has been going down consistently.
In the domestic market the dynamics between supply and demand has supported the lek vis-ஶis the euro, supply being higher for euro and demand being lower. The evaluation pressure for lek is also added up by the positive difference between interest rates of the domestic currency and the foreign one. In nominal terms the lek has gained 3.3 percent towards all the exchange bakset compared to the previous year. The strengthening of lek by 8.7 percent vis-ஶis the dollar has acted a san absorber of the effect of rising oil prices since oil is traded in dollars for the importing market in Albania.
What will prompt
inflation
The current and future macroeconomic dynamics have led BoA to declare that inflation will keep rising. This conclusion was made after consulting all previous calculations, the budget of 2008 approve din the parliament this week, the commercial banks expectations about financial indicators and exchange rates, confidence level of local business measure din 2007, as well as energy crisis ramifications in the future. Hence the Council decided to issue a number of warnings about which factors are considered risky. These include the credit for the economy which has had a very steep increase rate during the last eyras. Consumer loans which have been increasing directly influence the rise in prices. Fiscal policy as well is counted since the net positive balance of the fiscal account signals that the budget deficit will materialize in December and January. The budget deficit is expected also to rise in 2008. The current account is another reason why BoA think inflation will go up since the deficit in this particular account is expected to hit 10 percent of the GDP. Primary material and fuel prices going up are not going to help the situation. Finally considering the proposal to raise the price of energy made by KESH, BoA has declared that this has prompted up expectations about inflation.
Base interest rate
goes up
Considering all the above, the BoA supervision council decided to increase the normal interest rate on repurchase agreements by 0.25 points of percentage totaling it to 6.25 percent. This is expected to address the inflation pressures and balance things towards the target rate of 3 percent. This will also preserve the time structure of monetary means and fit to the trends analyzed by BoA.
