Albania’s central bank says it could consider a new cut to the key interest rate as inflation rate struggles to achieve the 3 percent target and the economy continues to operate below its potential.
The central bank’s baseline scenario is keeping the key interest rate at its current historic low of 1.25 percent until the third quarter of 2018, but governor Gent Sejko says if downside risks on inflation expectations materialize, the supervisory council could make a new cut.
“The balance of risks on our forecasts is shifting to the downside, both in the short and mid-run. In case further shocks materialize or have a possible negative impact on inflation expectations, the achievement of the inflation target could require an even more accommodative stance on the monetary policy. Responding to them, the Supervisory Council would be willing to consider a further ease of the monetary policy,” said Sejko.
Albania’s inflation rate picked up to an average of 2.1 percent in the first three quarters of this year, up 1 percent compared to the same period last year as global food and oil prices recovered with a considerable impact on local consumer prices, but the appreciation of the Albanian national currency lek against Europe’s single currency is estimated to have had a negative impact on the inflation target, making imported products cheaper.
The inflation rate is yet 0.9 percent below the central bank’s 3 percent target, estimated to have a positive impact on the country growth rate and reflect satisfactory levels of domestic consumption.
The Albanian economy recovered to 4 percent in the first half of this year, but household consumption was twice lower, reflecting growth mainly driven by some major energy-related investment such as the Trans Adriatic Pipeline and several big hydropower plants with not much direct impact on bringing welfare to average Albanian.
The low inflation pressures have also delayed the central bank’s scenario of the economy returning to equilibrium levels by another six months to mid-2019.
“The Bank of Albania has revised upward its economic growth forecast for the next three years, while expectations on the return of the economy to equilibrium and the return of inflation to its target have been postponed,” said governor Sejko.
“The Albanian economy continues to operate below its potential which continues to curb pressure on an increase in wages and production costs,” added the governor.
The Bank of Albania has been keeping its key rate at a historic low of 1.25 since May 2016 when the country was facing disinflation pressure triggered by a sharp drop in international oil and food prices.
Since late 2011, the central bank’s easier monetary policy has been mostly reflected on deposit rates and T-bill and bond yields on government’s internal borrowing, rather than lower loan interest rates.
The central bank explains the poor transmission of monetary policy with the high level of euroisation as euro-denominated deposits and loans account for half of the total and has announced measures to implement a de-eurisation strategy that would accelerate the reduction of the current high levels of foreign currency in the country’s banking system.
NPLs, which dropped to about 15 percent last September, down from a record high of 25 percent in mid-2014 are still consider a barrier for easier lending standards while poor demand by local businesses and households has forced some commercial banks to sharply increase lending abroad.
Lending continues to struggle to return to positive growth rates this year negatively affected by the mandatory write-off of non-performing loans that have spent three years in the loss category.
However, Albania’s banking system remains liquid, well-capitalized and highly profitable.
