Monetary policy instruments
The monetary policy of the Bank of Albania entered a new interesting phase at the end of year 2000, when it was decided to discontinue the use of direct instruments of monetary control. For a relatively long time of about 8 years, the implementation of monetary policy was conducted through two main instruments, which in itself consisted of two administrative decisions of the Bank of Albania. These decisions consisted in: (1) limiting the excessive growth of outstanding credit of commercial banks; and (2) setting an obligation for the state owned banks (or the banks in which the state had a share of capital) to respect the minimum level of interest rates announced by the Bank of Albania for time deposits in Lek
In 2000 Q3, banks were not responding to the continuous decrease in the administrative rate set by Bank of Albania These developments urged a redesign of the entire operational framework. It was decided that the monetary policy of the Bank of Albania would be implemented through the use of the market instruments. More specifically, it was decided to set as a benchmark policy rate, the interest rate of the repurchase (reverse) agreements with one week maturity. These transactions were to be conducted through regular weekly auctions.
Following, is a description of instruments used by the Bank of Albania to implement its monetary policy.
Open market operations are exclusively decided by Bank of Albania, which determines the type of instrument that will be used as well as the relevant terms and conditions of their execution. According to the purpose of their use, open market operations are divided into: main market operations, fine-tuning operations and structural operations. Repurchase and reverse repurchase agreements are used as the main open market operation and as fine-tuning operations, based on the instruments’ lifetime. Outright sale or purchases of the securities are instruments used in structural operations.