Latest monetary policy decision and calendar

Dear ladies and gentlemen,

Today, on 23 March 2023, the Supervisory Council of the Bank of Albania reviewed and approved the Intermediate Monetary Policy Report.

The new information analysed in this Report has resulted on the upper levels of our expectations. This information suggests that the economic growth in Albania has been relatively rapid and stable over the second half last year. At the same time, though inflation has been declining, the domestic pressures on prices, particularly those originating from labour market, are assessed to be strong and edging up.

Against this backdrop, in today’s meeting, the Supervisory Council decided to continue the normalisation process of the monetary policy stance. In line with our previous communications, the Supervisory Council deems that this decision is necessary to guarantee the stable return of inflation to the target, within a reasonable time horizon ant at rather low long-term costs on the Albanian economy.

The Supervisory Council - by factorising the domestic economic and financial trends, the expected developments in global markets, and the today’s movement of monetary policy - assesses that the economic growth will continue to remain in a positive territory, while inflation will gradually decline toward the target during the next year.

Below, I will outline today's decision and explain in more detail the rationale behind it. ]

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Inflation edged down in the two first months of year, to 7.2% and 7.1%, in January and February, respectively. The downward trend of inflation, which has started since November 2022, was in line with our expectations. Nevertheless, inflation in both first months of year was titled on the upside of our expectations.

In terms of basket, a slower annual upsurge in oil and food prices, in line with the trends observed across the international market, drove to the decline of inflation. On the other hand, inflation of other basket items showed relatively high and stable.

From a macroeconomic perspective, the reduced imported inflation has dictated this performance, while the domestic inflationary pressures continue to remain high. The fast growth in wages and production costs, the high demand for goods and services, and the economic agents’ expectations for further surge in prices, have fed these pressures.

The available information suggests that the Albanian economy has continued to grow in the fourth quarter of 2022 and in the first quarter of 2023. The growth in aggregate demand is based on the expansion in: household consumption; public and private investments; and in the experts of goods and services. The increased disposable income, the improved businesses and households’ confidence, the sound balance sheets of private sectors, and the still simulating financial conditions, have sustained this dynamic.

The fast and stable expansion of the aggregate demand has led to a fuller utilisation of production capacities in the Albanian economy. Our assessments suggest that the aggregate demand for goods and services has recorded a faster increase than the potential output of the Albanian economy. The historically high capacity utilisation rates in the private sector, the ongoing growth of employment, the fall of unemployment at the historically minimum rates, and the rapid increase of wages in the private sector reflect the above-stated conclusion.

In particular, the average wage in private sector has expanded by around 14% in annual terms in the last quarter of 2022. This raise has: underpinned the expansion in disposable income of Albanian families; fuelled the expansion of household consumption; and helped the sustainability of the economic growth. Nevertheless, on the other side, it has driven to increased production costs of businesses and has facilitated the transmission of soaring prices from international markets into the Albanian economy.

Against this backdrop, the domestic financial markets continue to remain calm and to pass through the insofar normalisation of the monetary policy stance, both in Albania and globally. The interest rates have increased across all financial products, while yields on Government securities have declined, by better reflecting the insofar movements of the monetary policy of the Bank of Albania. Also, the lek exchange rate against the main foreign currencies has shown appreciating trends, in response to the improved balance in international trade and the preserved relative attraction of financial instruments denominated in lek. Last, credit to the private sector, though slowing down, has continued to expand, in turn by supporting the expansion of both consumption and investments in the economy.

The update of projections confirms our previous expectations and suggests that the main economic trends observed in the last months will continue in the future. In more concrete terms, inflation is expected to gradually decline in the next quarter and return to the target in the middle of the next year. Also, the economic growth is expected to remain in positive territory, though the growth momentum is projected to be slightly slower in the current year.

These projections are conditioned by:

• the materialisation of expectations in international markets for a progressive reduction of inflation coupled with a solely temporary lower pace of growth across our trading partners;
• the materialisation of our expectations for preserving a stable and yet simulating financial environment in Albania;
• the materialisation of budget projections for a slower pace of fiscal consolidation during the year;
• a further movement towards normalisation of monetary policy stance in today’s meeting.

In particular, the Bank of Albania, in consistence with the previous judgements, assesses that the further normalisation of the monetary policy stance is a necessary step to guarantee the economic and financial stability of Albania.

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Judging on the above, the Supervisory Council decided to:

• Increase the policy rate to 3.00%, from  2.75%;
• Increase the overnight lending rate to 4.00%, from 3.75%;
• Increase the overnight deposit rate to 2.00%, from 1.75%.

In the Supervisory Council’s judgement, the elevated inflationary pressures originating from the domestic environment are a significant risk factor, first for safeguarding the price stability objective, and further for the sustainable and long-term growth of Albania. Given these circumstances, it has deemed necessary the reduction of monetary stimulus through the raise of policy rate. The Supervisory Council considers that this measure is in line with our previous communications and consistent with the recent movements of the main central banks.

Based on the current information, the Supervisory Council deems that the most part of the needed monetary normalisation has been already carried out. In line with the previous communications, the Supervisory Council highlights that the future monetary policy stance will be guided by the new data, particularly by the inflationary pressures balance, the sustainability of the economic growth, as well as by the other indicators on the economic and financial soundness of Albania.