BANK OF ALBANIA
PRESS RELEASE
Governor Sejko: Statement to the Press Conference on Monetary Policy Decision, 21 December 2022
Publication date: 21.12.2022
Dear Ladies and Gentlemen,
Today, on 21 December 2022, the Supervisory Council of the Bank of Albania reviewed and approved the Intermediate Monetary Policy Report.
The Supervisory Council deemed that the Albanian economy is still suffering the external shock effect. Nevertheless, inflation trajectory appears to have recorded a turning point towards reduction in the fourth quarter, while soaring prices and added uncertainty continue to weigh down on economic activity.
The updated forecasts for the future suggest that inflation will return to the target in the first half of 2024. In addition, economy in Albania is expected to grow in the future, though slowing the momentum in the short run, and edging up towards its potential in the medium term.
The Supervisory Council assessed that so far the normalisation of monetary policy stance has contributed in mitigating the inflationary pressures, through: controlling the inflation expectations, reducing uncertainty; safeguarding stability on financial markets; and guaranteeing the stability of our national currency.
Based on these considerations, the Supervisory Council decided in the today's meeting to maintain the same the monetary policy stance. This decision factorises the reduced inflation in Albania and abroad in November 2022 and enables us to rapidly assess the speed of monetary policy normalisation, in full concordance with safeguarding our price stability objective and the positive economic growth pace.
[Below, I will outline today's decision and explain in more detail the rationale behind it. ]
Inflation of consumer prices was slightly up in October and moderately down in November, settling at 8.3% and 7.9%, respectively.
In terms of consumer basket, inflation declined on the back of lower prices of oil and transportation costs, coupled with volatility in prices of food items in opposite directions. Inflation of other items of the basket showed less volatile. However, excluding the electrical energy price, the inflation rate - across almost all items in the basket - remains at high historical levels and exhibits clear signs of the impact stemming from the external shock.
From the macroeconomic perspective, the reduced direct effect of imported inflation determined the performance of inflation. This phenomenon was present in the performance of inflation in our main trading partners as well. Nevertheless, beyond the direct effect, their transmission in the cost of goods and services, along with the relatively stable demand for goods and services in Albania, which in tum ensures a high capacity utilisation rate, particularly in the labour market, continue to push up inflation.
The analysis of the available information suggests the economic activity in Albania has continued to grow in the second half of 2022. Though, similar to the second quarter, the economy has decelerated the growth pace, in a context of future uncertainties, increased production costs and dampened external demand. These consequences are manifested in the form of a larger import bill for the Albanian economy and slower public and private investments.
On the other side, labour market has performed quite positively, in 2022 Q3. Employment increased by 4.2% in annual terms, unemployment hit a new historical low of 10.6%, while average wage in private sector set to an annual growth of 12.4%. This performance shows that the aggregate demand in Albania remains solid, sufficient to generate an increase in both employment and wages. In addition, it exhibits the relatively sound basis of economic growth in Albania.
Financial markets continue to be calm. Lek exchange rate against the euro has trended towards appreciation, while the monetary policy normalisation, in both Albania and the euro area, is increasingly reflecting a complete pass through. Despite the interest rates applied on main financial products - deposits, loans and Government’s securities have edged up, they continue to accommodate the growth. In response to them, the annual credit continues to manifest positive monthly flows, though at a decelerating pace in October, coupled with a good credit portfolio quality which has been trending towards improvement.
Our baseline projections for the next two years, suggest the Albanian economy will continue to grow, while inflationary pressures will be reducing.
Inflation is expected to reach a turning point in the fourth quarter of 2022, progressively reduce during 2023, and return to the target in the second quarter of 2024. This projection is based on: the expected reduced inflation in global environment; the progressive decreased second- round effects in Albania; and on the preservation of the positive economic growth rates over the coming period. Economic growth is expected to remain moderate in the second half of the coming year and gradually converge towards its historical rates in the next period, by providing a more balanced demand and supply ratio in Albania.
The updated projections for the future confirm our previous expectations. Nevertheless, this updating has suggested a more gradual normalisation of monetary policy stance.
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Judging on the above, the Supervisory Council decided to:
- Keep the policy rate unchanged, at 2.75%;
- Keep the overnight lending rate unchanged at 3.75%.
- Keep the overnight deposit rate unchanged, at 1.75%.
The Supervisory Council re-affirms its assessment that the elevated inflationary pressures are the main risk to the stable and long-term growth of the Albanian economy. In addition, the Supervisory Council emphasises that, based on the current information, the further normalisation of monetary policy stance remains necessary to safeguard our price inflation objective. In presence of a risk balance to inflation still on the upside, this normalisation turns even more necessary.
In line with the previous statements, the Supervisory Council highlights that the speed and intensity of this normalisation has been and will continue to be data-dependent. The monetary policy stance will aim at providing the necessary conditions to safeguard price stability objective in the medium term, simultaneously paying attention to minimise their impact on curtailing the economic activity.
The Supervisory Council will carefully monitor the situation to continuously assess the inflationary pressures performance and identify in a timely manner the necessary measures for meeting the target.
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Dear Ladies and Gentlemen,
Taking the opportunity of this public communication, which is the last one for this year, I would like - in line with the tradition - to present a brief overview of the work of the Bank of Albania throughout 2022.
This year - as already presented – triggered challenges to: the Albanian economy, in both macro and microeconomic levels; the monetary and financial stability; and to the decision-making of public and private sectors. The Bank of Albania, in capacity as the monetary authority of Albania, a key institution in safeguarding the financial stability, for developing the financial market and improving the payment systems, as well as a constitutional institution in charge of a set of functions for promoting the stable economic development of Albania, has provided a crucial contribution in dealing with these challenges.
Following, I will list some of main aspects in our work.
First, we have initiated a normalisation cycle of monetary policy stance during 2022, by raising the policy rate to 2.75% at the end of 2022, from the historical minimum of 0.5% at its beginning. This monetary policy action is similar to the one across central banks, globally. This action was taken in view of the strong and unprecedented shock of prices in external market, stemming from the unexpected military aggression of Russia to Ukraine, which jeopardised price stability worldwide.
The normalisation of monetary policy stance was a necessary and thoughtful process. It is necessary as it creates the indispensable premises to safeguard our inflation target, which is our legal mandate and, in turn the best contribution that the Bank of Albania can give for the economic growth and the welfare of the society in both the short run and medium term. The history of economy shows that the high- inflation periods are characterised by low and volatile economic growth, less jobs, lower wages and income for a considerable part of the society. At the same time, this normalisation was prudential, always driven by careful analyses of the new information, aiming for the necessary monetary measures in place to contain inflation with the lowest costs on the economic activity. This philosophy shall guide our monetary policy decision-making in the next year as well.
Second, the Bank of Albania has contributed in providing a sound and effective financial system, through: strengthening the legal and regulatory framework; prudential supervising the banking activity; intensively collaborating with homologue authorities; as well as through fighting money laundering and terrorism financing. In this context, we updated the annual cycle of resolution plans and carefully managed the resolution fund. The latter has been increasing continuously and provides an added guarantee to withstand financial shocks.
In parallel with our work, I am pleased to note that Albanian banks have good reserves of capital, liquidity and low non-performing loans ratio; the latter were down to 5% in October, the lowest historical level. In addition, our stress tests show that the banking system is, overall, resilient to shocks even in adverse scenario, and able to support the economy.
Third, the Bank of Albania has provided modern and effective systems for the conduction of payments and we have met the economy’s demand for cash, by enhancing the confidence in our monetary and financial system. Thanks to a multi-year work, financial inclusion of the population and use of electronic payment instruments have been increasing, as shown by the higher number of Albanian citizens having a bank account and figure of electronic payments. Meanwhile, the AIPS Euro operationalization for the settlement of the domestic euro-denominated transfers within the country has considerably lowered the costs and has saved around EUR 10 million to Albanian citizens.
Also, in 2022, we completed the series of new banknotes with the last two denominations, of 500 Lekë and 2000 Lekë, respectively.
Fourth, the Bank of Albania has continued to manage the foreign exchange reserve of Albania, in compliance with the best criteria in the field of liquidity and security. In operational view, I would like to briefly summarise the measures we have undertaken for a broader participation of individuals in the auctions of Government’s securities, by reducing fluctuations in financial markets and enabling a better monetary policy pass-through in markets.
Fifth, the Bank of Albania has actively contributed in the European integration process, while enhancing the dialogue with the Albanian and foreign partners. The opening of negotiations in July 2022 marked an important step for the Albania's progress in its path towards the EU membership, while a more intensive commitment is needed. To this end, the Bank of Albania has embraced a timely and qualitative action in this regard. The latest Progress Report of the European Commission assesses that the Bank of Albania is financially independent, with sufficient instruments, competence and administrative capacity to function effectively and to conduct an efficient monetary policy. We will continue to contribute to the long-lasting aspiration of Albania, which is the integration process of the county in the European Union. In addition, we have collaborated throughout 2022, with the World Bank and other institutional partners for the establishment of two important national strategies: “The Climate Changes in Banking System”; and 2. “Financial Education and Inclusion” strategy.
Last, I would like to highlight that the Bank of Albania has worked and progressed across all other aspects of its activity: financial statistics; communication with public and with all the economic and society actors; financial education; scientific research; etc.
The cautious, coherent and professional decision-making of the Supervisory Council of the Bank of Albania has oriented and underpinned the accomplishment of our work objectives and results. This decision-making has given life to the mission, vision and values of the Bank which are presented in the Medium-Term Development Strategy of the Bank of Albania.
To ensure compliance with the law and other acts regulating the daily activity of the Bank of Albania, the Supervisory Council is regularly informed by the internal and external auditors.
Concluding, I assure you that the Bank of Albania has been fully committed and will continue to be intensively engaged for the thorough improvement of its work and in adopting the best central banking standards. Both global and domestic environments remain challenging, but the Bank of Albania will be vigilant on the new developments to meet our legal duties for the welfare of the Albanian citizens.
I wish you a successful and prosperous year!