25bps More Cuts In 2013

BMI View: Inflationary pressures will remain subdued in Albania over the coming months, due to easing agricultural prices and low demand-pull price dynamics. The National Bank of Albania (BoA) will lower its policy interest rate by 25bps to 3.25% by the end of 2013, and by a further 75 bps in 2014, as low prices allow the central bank to try to stimulate growth through adopting a more accommodative monetary policy.

The Bank of Albania (BoA) lowered its policy interest rate by 25 basis points (bps) to 3.50% in July, in line with our view that the central bank would continue its rate cutting cycle in H213 (see 'Inflationary Pressures To Ease', May 21) . We hold to our forecast for the central bank to lower the policy interest rate by a further 25bps to 3.25% by the end of 2013, but revise down our forecast for rates to be lowered to 2.50% in 2014, from 3.00% previously. The downgrade comes against the backdrop of increasingly dovish statements made by BoA Governor Ardian Fullani , who said the July interest rate cut was

needed to "create better conditions for the growth of domestic demand".

Record Low
Albania - Bank of Albania Interest Rate, %

BMI View: Inflationary pressures will remain subdued in Albania over the coming months, due to easing agricultural prices and low demand-pull price dynamics. The National Bank of Albania (BoA) will lower its policy interest rate by 25bps to 3.25% by the end of 2013, and by a further 75 bps in 2014, as low prices allow the central bank to try to stimulate growth through adopting a more accommodative monetary policy.

The Bank of Albania (BoA) lowered its policy interest rate by 25 basis points (bps) to 3.50% in July, in line with our view that the central bank would continue its rate cutting cycle in H213 (see 'Inflationary Pressures To Ease', May 21) . We hold to our forecast for the central bank to lower the policy interest rate by a further 25bps to 3.25% by the end of 2013, but revise down our forecast for rates to be lowered to 2.50% in 2014, from 3.00% previously. The downgrade comes against the backdrop of increasingly dovish statements made by BoA Governor Ardian Fullani , who said the July interest rate cut was

needed to "create better conditions for the growth of domestic demand".

Record Low
Albania - Bank of Albania Interest Rate, %

We believe weak inflationary pressures will predicate an increasingly accommodative monetary policy direction by the BoA over the coming m onths, which will try to provide the stimulus required to support lending and growth. Consumer price index (CPI) growth came in at 2.3% year-on-year (y-o-y) in June, ( well belo w the BoA's target rate of 3.0%) having fallen from 2.7% y-o-y in January 2013. We forecast inflation to average 2.4% in 2013 and revise our forecast for inflation to average 2.0% in 2014, from 2.5% previously, due to falling agricultural prices and expectations of weak domest ic demand in H213.

Price Pressures To Ease
Albania - Consumer Price Inflation, % chg y-o-y

'F ood and non-alcoholic beverages' price growth has been the most significant contributor to inflationary pressures over the past few months. Food prices rose 5.4 % y-o-y in June , against the backdrop of a poor harvest in the world's maj or grain producing countries elevating supply-side food price pressures, reflected in -part by a 30.6% y-o-y rise in vegetable prices in June. The BoA estimates that agricultural price s has accounted for over 90% of headline price growth in 2013, due to volatile global prices and their large weighting in the CPI basket (39.4%) . Give n that o ur Commodities Team anticipates a better harvest in 2013, and expects global food prices to ease towards end-2013, we see declining food prices driving inflation lower over the coming months.

Food Prices To Fall
Albania - Components Of Consumer Price Index, % chg y-o-y

Drilling-down further into the data, we note that price growth has remained subdued in other key components of the consumer price basket , ensuring that the country's core inflation rate (which strips out housing and food prices ) has remained low . In June, u tility prices contracted 1.0% y-o-y , as a result of fuel prices following a downward trajectory since start of the year . C lothing and footwear prices, a key export industry for Albania , contracted by 3.6% y-o-y in the same month. W eak demand for clothing is a product of unfavourable economic conditions undermining consumer confidence and restricting private consumption in the country.

Subdued
Albania - Consumer Price Index (RHS), and % chg y-o-y (LHS)

We believe wea k domestic demand will moderate price growth over the next few quarters , as the uncertainty over the direction of the country's economic recovery undermines consumer spending. Low wage growth is making consumers reluctant to consume and inves t, while high unemployment (12.9% in Q113 ) highlights plenty of slack in the domestic labour market . While we expect the country's economic recover y to pick- up more steam in 2014 (we forecast real GDP growth of 2.6%), the severity of the country's economic slowdown is such that consumer spending is unlikely to return to pre-crisis levels anytime soon, restricting price growth in 2013 and into 2014.

Risks To Outlook

The main risks to our outlook lie to the downside. Although we have factored weak domestic demand into our inflation forecasts for 2013, a slower-than-expected economic recovery would prolong the slump in domestic demand, leading to a greater drop in inflation over the next few quarters. In such a scenario, we would not rule out the BoA lowering the interest rate to 3.0% by the end o f 2013 , in attempt to spur economic growth.

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This article is tagged to:
Sector: Country Risk
Geography: Albania, Albania, Albania, Albania
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