TIRANA, June 25 -The Supervisory Committee of the Bank of Albania decided, in its meeting held June 25, to leave unchanged the interest rate of 6.25 percent. The interest rate directly influences the price of money, bonds, bank deposits and other financial tools. Any increase in interest rates from the Bank of Albania will immediately increase interest rates in treasury bonds and increase the cost of the country’s debt.
The Supervisory Committee noted that world economic activity slowed down in April 2008, growing only 3.7 percent during this year, or 1.2 percent less than during 2007. While developing countries will apparently contribute most of the world’s economic growth, the economic slowdown in the developed countries is expected to further reduce the world’s economic growth.
Oil prices continued to increase during May as the annual price increase of oil reported in May 2008 reached 97.5 percent. Also, food prices remain extremely high and have had an impact upon the Albanian market. Further, world financial markets are feeling the full effect of the financial crisis in the U.S.A. The Bank reported interest rates are going to increase, reflecting the predisposition to tighten monetary policies in the Euro zone.
Inflation in Albania was 4.2 percent in May, compared to 4.4 percent in April 2008. In recent months, inflation has come under pressure from the supply side. Just as in April, inflation is reflected in the increase in prices of food and power. Monthly inflation dropped to -1 percent, the lowest monthly inflation rate in the last two years. The inflation rate in May was heavily influenced by the seasonal price decrease for unprocessed food.
The state budget also increased as tax and customs authorities collected more than anticipated. State expenditures have followed normal cyclic patterns, as in the first four months of 2008 state institutions managed to spend 14 percent less than planned. Capital investments met only 60 percent of their targets during this same period. Also, in the first four months of 2008 the state borrowed, primarily, in the domestic financial market.
During April 2008, the foreign trade volume reached Euro 368 million, or eight percent more than in March 2008. The trade deficit for April, as well as the annual trade deficit, increased despite the increase in exports.
The demand from the private sector for new loans remains high. During April, the annual growth rate for loans to the private sector remained at the same level as in the previous month, at around 43 percent. The growth rate of loans to individuals came to a stop at 51 percent while most loans were awarded to finance the purchase of houses and apartments.
In May, liquidity in the banking system remained almost at the same level as one month earlier. The Bank of Albania has continued to intervene in the market through repurchase agreements with one week fixed maturity. The volume of traded repurchase agreements from May reached ALL 2.7 billion. Through repurchase agreements, the Bank of Albania has tried to meet the demand for liquidity and to monitor the short-term stability of interest rates.
The trade volume in financial markets remained at the same level as in previous months. Interest rates, compared to the same period last year, increased for all types of loans, independently of currency and maturity period. The increase reflects developments in domestic and foreign financial markets.
Second round effects may influence inflation
The Bank of Albania has noticed that commercial banks are expecting inflation to fall slowly and to come slowly under the threshold decided by the Bank. The latest predictions on the development of the inflation rate show that by the end of the year 2008, inflation is going to fall below the four percent target set by the Bank of Albania.
The Supervisory Board also investigated the risks that can influence the inflation rate during 2008. The Board specifically evaluated second round inflation shocks generated by the increase of wages and the payment of power prices. For the moment, the Supervisory Board considers the increase of wages is going to generate very little pressure on inflation.
Is the Bank of Albania
announcing another increase of the interest rate?
The other risks to inflation come from the supply side in the form of increased prices in food and energy, oil and power. Nevertheless, the demand side, including the rapid increase of loaning activity and increase in wages and state expenditures, may affect the inflation rate, as well.
The Bank of Albania will closely monitor the monetary policy and risks that can increase inflation. The Bank will keep an eye on the second round effects on inflation due to the increase of wages and is going to take the necessary measures to minimise their effects on the Albanian economy.
