The supervisory board of Albania’s central bank decided on July 31 to cut the base interest rate by 0.25pps to a historic low of 3.50% after keeping it unchanged since the start of the year, the bank said in a statement on its website. The decision is expected to create better conditions for the central bank to meet its mid-term inflation target, the statement reads.
The rate setters consider that the economic growth continues to develop below its potential, which was the factor contributing for the low level of inflation. The central bank estimated that the economic growth was weak in the first half of 2013. Economic activity continue to suffer from the poor performance of aggregate demand, which in turn reflects uncertainty over future economic agents and relatively tight financing conditions. The growth was mainly supported by foreign demand as well as demand by the public sector. Consumption and private investment remain weak, reflecting uncertainty about the future as well as a slow growth in disposable income.
Referring to fiscal policy, the central bank said that it has been expansionary in H1 2013. Budget expenditure increased by 12.2% y/y in the period, mainly due to rising capital spending. At the same time, budget revenues declined by 2.9% y/y. The level of public debt increased by 63.3% at end-June.
The central bank has repeatedly said that maintaining budgetary discipline in the mid-term is of key importance for improving the business climate in the country. The monetary authority suggested that measures to control the debt level would contribute for reducing the risk premia in the economy. In this regards, the authorities need to set up transparent and reliable fiscal rule.
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