The Supervisory Council of the Bank of Albania (BoA) has decided to maintain the base interest rate at 1.00%, as well as to keep the interest rates for the overnight deposit and lending facilities at 010% and at 1.90%, respectively. The continuation of the loose monetary policy was expected, in our view, given the Central Bank’s aim to support economic growth by maintaining low interest rates and easing appreciating pressures on the exchange rate. The BoA announced monetary policy will remain accommodative in the medium-term, and the stimulus intensity will depend on the speed and sustainability of the economic activity improvement.
Overall, the Albanian economy continues on a positive development trend, the BoA said. Aggregate demand remained on the rise in H2’18, which improved main economic and financial balances, as well as led to an increase in production and employment growth, the Central Bank assessed. GDP growth in Q3’18 was 4.45%, driven by strengthening expansion of private consumption, investments and exports, as well as by the annual growth of electricity output. Economic growth was also reflected in the industry, services and construction sectors’ activity expansion, BoA added. On the downside, preliminary BoA analysis pointed to a slowing of GDP growth in Q4’18 due to lower contribution from electricity production, which was seen as a temporary effect, however.
Albania’s economy continues to benefit from the generally favorable external economic environment, alongside relatively financing costs. BoA expects that GDP will remain on the rise in the next three years. Expansion in aggregate demand will continue supporting employment and wage growth, which will give a boost to the domestic inflation. Inflation is expected to reach the BoA’s 3.0% target in H2/2020. In Q4’18, the average inflation was 1.8%, down from 2.2% in the previous quarter. The decline was due to temporary supply-side shocks and transmission of the decelerating effect from the exchange rate appreciation. The effect is expected to continue in H1’19, but then it should fade off, the Central Bank said. On the upside, domestic mid-term and long-term inflationary pressures are accumulating strength on the back of improvement of the cyclical position of the country, BoA added.
BoA’s accommodative monetary policy has resulted in historical low levels of interest rates on deposits, credits and government securities. Liquidity in the financial markets has been improving and risk premiums have trended downwards, the BoA said. The exchange rate was stable in January reflecting improved balance between demand and supply for foreign currency. Local banks continue to enjoy good liquidity ratios, capital and profit levels. The NPL ratio fell to 11.1% of the total at end-2018, marking a sustainable progress, the Central Bank said.
Lending activity to the private sector showed some signs of recovery, but the cleaning of the balance sheets from both NPLs and the effect of the appreciation of the exchange rate continued to pressure crediting downwards. Excluding these two factors, credit to the private sector rose by 5.9% y/y at end-2018, BoA announced. Credit growth was faster for ALL-denominated credits and for consumer loans.