The Supervisory Council of the Bank of Albania reviewed the monetary policy interim report and in conclusion of the analytical information and forecasts presented, the Supervisory Council decided to keep the base interest rate unchanged, at the level of 1.25%.
This was confirmed by the Governor of the Bank of Albania, Gent Sejko in a press conference on Wednesday.
He said that the new available data show that the Albanian economy and its monetary indicators have developed in line with Central Bank's expectations, adding that in line with these forecasts, economic activity and inflation have increased.
Speaking of investments, Governor said that the positive contribution of investments reflects the expanded private investments, both domestic and foreign investments, while he stressed that the public investments were down.
"The expansion of private investments benefited from the ample liquidity and the low interest rates in the financial markets. Bank of Albania expects an increase of the private domestic demand even during the second half of year. However, business and consumer confidence remains volatile, thus showing the still unconsolidated position of the private domestic demand as an engine of the economic growth," he said.
In parallel, Sejko said that the weak economic performance of our trading partners, the fall of price in some of our traditional products of exports, and the high bill of import reflecting some of the foreign direct investments in Albania, drove the expansion of the trade deficit by 26.3%, during the first five months of the year. Bank of Albania deems that a similar picture will characterize also the second half of year, and the external trade exchanges shall not support the economic growth during 2016.
"The surplus of the public sector's financial activity amounted ALL 18.2 billion as at end of May 2016, compared to a deficit of ALL 10.6 million in the same period of the previous year. This strong fiscal consolidation reflected the growth of revenue and the contraction in budget expenditure. In particular, the latter reflected the reduction of capital spending, remaining below the respective planned level. In line with the budget projections, we expect the pace of public expenditure to accelerate and the fiscal consolidation to slowdown during the second half of the year. Nevertheless, Bank of Albania re-emphasises that a more even allocation of budget expenditure would help to decrease the fluctuations of the economic activity and financial markets," he said.
Further on, Governor said that the performance of deposits and liabilities of banking system balance sheet is stable. Nonetheless, lending remains sluggish. Cleaned up from the effect of non-performing loans write off, lending to private sector recorded 2.5% annual growth in April. The recovery of banking credit remains a precondition for a stable and long-term growth, and shall be one of the medium-term objectives of the Bank of Albania and of other public authorities' work.
"The new information and the update of forecasts have not changed our outlook for the future. The economic growth projection for 2016 remains unchanged, whereas short term inflation forecasts have shifted slightly upwards and medium term inflation projections have not changed. In conjunction with these forecasts, the Bank of Albania expects a progressive improvement of economic activity in the medium term. These improvements will aid the gradual increase of inflation and its return to target at the end of 2018," he added.
Albanian economy and financial system immune to the direct shocks from Brexit
At the conclusion of the analysis, the Bank of Albania evaluates that the risk balance on the expected medium-term developments continues to trend down. In particular, Bank of Albania is attentively following the Brexit phenomenon and the consequences it may have for the Albanian economy.
"Our analysis shows that the Albanian economy and financial system are immune to the direct shocks that may come from the expected exit of the United Kingdom from the European Union. Our trade exposure to United Kingdom, in the form of imports and exports, is almost ineligible. Also, direct or financial investments originating from United Kingdom in Albania are low, while remittances account for somewhat higher than 10% of total remittances. In parallel, the Albanian banking system has a low exposure to the most extreme fluctuations of the British pound and British financial system," Governor Sejko declared.
On the other hand, he said that Albania has a higher exposure to possible indirect shocks that Brexit may have on the European economy and financial system. The latter are our main economic and trading partners. Any negative reaction of them would be transmitted to Albania as well. Related to these indirect effects, Bank of Albania emphasized that: the materialisation probability of the extreme shocks is relatively low. Secondly, the Albanian economy and financial system appear to be more prepared to face the possible shocks, compared to similar previous situations. Thirdly, in the event of a further worsening of the situation, Bank of Albania has the will and the right instruments to guarantee the accomplishment of its price stability objective and to support the activity and soundness of the financial system.