BANK OF ALBANIA

PRESS RELEASE
Governor Sejko: Statement to the Press Conference on Monetary Policy Decision, 04 May 2022

Publication date: 04.05.2022

 

Dear media representatives,

 

Today, on 4 May 2022, the Supervisory Council of the Bank of Albania reviewed and approved the Quarterly Monetary Policy Report.

The Albanian economy continues to be under the influence of the shock caused by the conflict between Russia and Ukraine. This shock has led to an upswing in prices of food, raw materials and energy; it has brought more uncertainties to economic agents and has been reflected in more restricted financial conditions. This complexity of factors has driven inflation upwards whereas economic growth has been downwards.  

The new analysed information suggests that supply-side shocks will be stronger and more persistent over time than our previous assessments. Consequently, inflation is expected to remain above Bank of Albania's target for a longer time, while the pace of economic growth - albeit positive - will be lower than our start-of-year projections.   

However, the Supervisory Council notes that the Albanian economy will preserve its monetary and financial stability. This forecast takes into account our following expectations: the conflict will not escalate; pressures in the global markets will alleviate over the next year; and economic growth with our trade partners will carry on. Also, the realisation of this prediction requires the gradual normalisation of the monetary policy in the medium-term horizon.  

Against this backdrop, in today's meeting the Supervisory Council decided to keep the monetary policy stance unchanged.  

[Let me explain in more detail the main findings of the Quarterly Report, our expectations for the future, and the reasons backing today's decision.]

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The new analysed data showed that inflationary pressures in the global markets were stronger and more persistent than our previous expectations. The conflict in Ukraine and sanctions imposed on Russia caused new disruptions on the global production and distribution chains, while future uncertainties intensified. Prices in the global markets experienced a sharp hike and central banks acted aggressively as they contracted the monetary policy stance.

Domestic inflation increased during the first quarter of the year, averaging 4.4%. A particularly noticeable increase was recorded in March, where inflation jumped to 5.7%. For the most part, the inflation hike was caused by supply-side shocks which in turn were driven by the increase of prices of food and oil. However, in parallel, the upward trend of inflation has also reflected the quick economic recovery over the past year, the increase of employment and wages, as well as the upward trend of inflationary expectations. 

The expansion of aggregate demand and the improvement of the job market have generated heightened inflationary pressures in the domestic economy. According to the INSTAT data the gross domestic product grew by 8.5% during 2021, surpassing the levels registered prior to the earthquake and the pandemic. Consumption, investments and exports supported the economic growth.

The higher demand for goods and services will be accompanied by an increase in employment, wages and production costs. As employment increased the unemployment rate fell to 11.4% at the end of 2021, which was reflected in the rapid increase of wages in the last two quarters of the previous year. The improvement of the job market will help buffer part of the shock caused by higher prices, but it also translates in more persistent pressures on inflation over time.

In macroeconomic terms, the expansion of aggregate demand is driven by the alleviation of restrictive measures imposed to curb the pandemic, improved confidence, higher external demand, as well as stimulating monetary and fiscal policies.

In particular, the strong monetary stimulus of the past two years has supported economic growth from the pandemic and earthquake shocks. The stimulating monetary policy has generated a stable financial environment, characterised by ample liquidity, low lending costs and a stable exchange rate.  In addition to these factors, the soundness of the banking sector and the higher demand for funds, have supported the stable credit growth. In March, the credit portfolio of the private sector increased by 12.8%, fulfilling the needs of households and enterprises for consumption, investments and working capital.

In March, the higher policy rate was rapidly transmitted to the short-term segments of the monetary market.  It has helped to better anchor inflationary expectations and stabilise exchange rate pressures. However, its impact on the prices of banking deposits and loans is not fully apparent yet.

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Our direct exposure to countries involved in the conflict is relatively low.  However, war in Ukraine has faded the perspective for global growth, particularly in the European economies and has increased inflationary pressures.

The updates on our baseline projections suggest that domestic inflation remains relatively high during the succeeding period.  The price upsurge in the global markets, the higher aggregate demand, as well as job market dynamics are expected to keep inflation close to the current level in 2022. Furthermore, it is expected to gradually decease in 2023 and converge towards the target at the first half of 2024.

Against this backdrop, the Albanian economy is forecasted to continue growing in the medium-term horizon. The economic growth will continue to be supported by favourable financing conditions, sound balance sheets of the real and financial sector, as well as the continuation of export growth.  However, the growth pace is expected to be slower compared to the beginning-of-year projections.

Judging on the above, the Supervisory Council deemed that the monetary policy stance is adequate to meet the price stability objective and underpin the economic growth. For these reasons the Supervisory Council decided to:

  • Keep the policy rate unchanged, at 1.0%;
  • Keep the overnight deposit and overnight lending rates, unchanged at 0.1% and 1.9%, respectively.

Given the available information, the current level of monetary stimulus provides the correct balance between the risk of inflation acceleration and the risk of economic growth slowdown.

However, the Supervisory Council will closely monitor the inflation dynamic and remains available to intervene at the right time and with the required force in order to guarantee the price stability objective.

The Supervisory Council deems that safeguarding this objective will require the normalisation of the monetary policy stance in the medium run. In accordance with our baseline projections, this normalisation will be a gradual process extended over the succeeding two years. However, as interest rates in Albania are quite low, the monetary policy will remain stimulating during this entire period.  On the contrary, the materialisation of the risk scenarios may engender deviations from this scenario. 

In any case, the monetary policy stance will be driven by the new data and the need to observe our price stability objective.