Back in February this year the MPC asked the Bank to take steps, and the PRA to engage with PRA-regulated firms, to ensure negative rates could be implemented in practice if needed; that work is due to complete in August. And the MPC have begun work to reconsider our previous guidance on the appropriate strategy for tightening monetary policy, as we committed to in our February minutes. Of course I am just one of nine members of the MPC navigating a path for the economy on this journey – different MPC members will have their own views about where the economy is heading and what the appropriate path should be. The personnel on the expedition are also changing; at the August MPC meeting we will temporarily be down to eight members and there will be two new members joining later in the year. Back in March last year the outlook for the economy was in pretty uncharted territory. Over time prospects have become clearer and we have become more able to rely on the map provided by our forecasts. Now that the recovery is becoming more established, and the risks are once again two sided, we are heading back to more familiar, but still challenging, ground. The map is becoming more detailed and the contours for the immediate path ahead are filling in, but at the same time choosing the precise direction of travel is becoming less straightforward.
The improvement reflects the expansion of domestic demand - that is increase in consumption and private investments - whereas foreign demand appears weak and fiscal policy continues the consolidating trend. The new information obtained in the first half of the year is in line with this judgement. The intensity of supply shocks, which led to the rapid decline in inflation over the first half of the year, seems to decrease. Inflation recorded a slight increase in May, reaching at 0.7%. This performance confirms our judgement about the transitory nature of the abovementioned shocks. However, our analyses confirm that the balance of inflationary pressures is still weak. Economic activity remains below potential, suggesting that the return of inflation to target will be a gradual and medium-term phenomenon. Our monetary policy has assumed a stronger stimulating stance over 2016. After two consecutive cuts in April and May, the key interest rate currently stands at 1.25%. The strengthening of the monetary stimulus has led to lowering the interest rates across all segments of the financial market, thus stimulating the increase in consumption and private investments. The Bank of Albania deems that the financial setting - characterised by low interest rates and ample liquidity - should encourage banks for a more positive approach towards lending. Banking sector’s soundness indicators have been improving, in response to economic activity recovery and other measures undertaken by Albanian authorities. Liquidity and capitalisation indicators maintain good parameters, whereas the stock of nonperforming loans - albeit fluctuating - has been put under control.