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BANK OF ALBANIA - Manager of Currency

The main responsibility of the Bank of Albania is to formulate and implement its monetary policy, with a view to meeting its primary objective established by law: to maintain price stability .

The Bank of Albania, in this role, acts as manager of the country’s currency - by balancing the currency in circulation and credit with the needs of the economy. This means that putting too much currency into circulation will eventually lead to inflation , while less currency in circulation will prevent the economy from growing. As the currency manager, the Bank of Albania seeks to reach equilibrium between these two extremes: that is, to promote economic growth by maintaining price stability.

To achieve this objective, the Bank of Albania controls currency resources by influencing the ability of banks and financial institutions to create "currency in account" through loans or investments. The Bank of Albania, therefore, requires banks and financial institutions to hold reserves with the central bank.

In general, banks and financial institutions that collect deposits, must keep a certain percentage of deposits as a reserve not to be used for lending or investments. It is this level of reserves that determines the amount of currency that a bank or financial institution can put into circulation through lending or investments. Thus, the Bank of Albania influences indirectly the level of currency in the economy, through the level of reserves.

The Bank of Albania employs some instruments through which it intervenes in its relationships with commercial banks to ensure that market conditions and the level of currency in the economy comply with its final objective - price stability and economic growth.

These instruments may be direct, that is, they are transmitted through relevant regulations and guidelines , and establish and limit the quantity of monetary aggregates and credit. These instruments include setting the minimum interest rate on lek deposits and the limit for commercial bank lending to the public.

The instruments can also be indirect when their effect is transmitted through the market, by impacting on money demand and supply. The Bank of Albania implements a range of  indirect instruments , such as the
level of required reserve , open market operations (repurchase and reverse repurchase agreements, outright transactions and interventions in domestic foreign exchange market ) and standing facilities ( marginal lending facility , deposit facility and Lombard loan ), whose use is sanctioned by a set of regulations on monetary policy and instruments of the Bank of Albania.

 

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