PRESS RELEASE
Governor Sejko: Statement to the Press Conference on Monetary Policy Decision

Dear media representatives,

Today, on 2 February 2022, the Supervisory Council of the Bank of Albania reviewed and approved the Quarterly Monetary Policy Report.

The new economic and monetary information showed the swift and stable expansion of the domestic economic activity in the course of the second half of 2021 and the acceleration in inflation in the fourth quarter. The upswing in inflation was driven by stable factors, related to the progressive growth of the demand, employment and wages, also by transitory factors, related to the sharp rise of prices in international markets.

Our projections suggest economy will grow further in the next years. Inflation rate is expected to remain above our 3% target in the course of the current year, due to high prices in international markets. These shocks have resulted stronger and more persistent than under our initial assessments. Nevertheless, their impact on inflation is expected to gradually subdue during 2022. Further ahead, inflation is expected to robustly converge towards our target in the course of 2023, in reflection of the demand and supply balance and the increase of employment and wages in line with productivity. 

Against this backdrop, the Supervisory Council deemed that the current monetary policy stance remains adequate. The Supervisory Council judged that the current monetary stimulus serves to: bring inflation up to our target; underpin the further recovery of the Albanian economy; and maintain the right balance between risks that high prices in international markets may have on both the level of prices and economic activity in Albania.

[I will now outline in more detail the main findings in the Quarterly Report, our expectations for the future, and the reasons backing the today decision of the monetary policy]

***

The new information of the last months resulted, overall, in line with our expectations, though supply-side shocks are proving to be stronger and more persistent than currently anticipated under our initial assessments.

At global level, the economic recovery from the pandemic is strong, but uneven across countries. In addition, it continues to be characterised by supply-chain bottlenecks and shortages in labour force. The strong demand for goods and services, constrained supply and high prices of electricity have pushed global inflation up. In this context, global monetary policy perspective is moving towards normalisation, and this is reflected also in the behaviour of the international financial markets.

Inflation in Albania has risen swiftly in the fourth quarter, reaching at 3.7% in December. Inflation was present in prices across almost all consumer basket items, whose prices are freely determined in the market. Nevertheless, the increase in processed foods and oil prices drove inflation to accelerate in the fourth quarter.

In macroeconomic terms, the sharp upswing in inflation, in the fourth quarter, reflected both the gradual and persistent action of demand-side factors, and the strong impact - but transitory- of supply-side shocks.  In one hand, the continuing increase of the demand for goods and services was accompanied by a rise in employment and wages, coupled with a build-up of domestic inflationary pressures. This performance was reflected in the upward trend of core inflation in the course of 2021. On the other hand, the sharp rise in prices for foods, fuel, shipping costs and commodities in global markets, have considerably affected inflation picking up in the fourth quarter.

Domestic economic activity has been expanding at a relatively solid momentum.  INSTAT data show that the Albanian economy grew by 10.4% over the first three quarters of 2021. The available information signals a further expansion of economy in the fourth quarter. Our analyses show that the volume of economic activity in Albania has already surpassed the pre-earthquake and pre-pandemic levels, both in aggregate and sectoral level, by displaying the swift recovery of demand and the low structural impact that these shocks have provided on the production structure of economy. Overall, private sector's balance sheet remains sound, as shown by the growth of deposits and reduction of non-performing loans. Meanwhile, business confidence has performed consistently with e further expansion of output.

The recovery of aggregate demand reflected the reduction of restrictions, improved confidence, improved partner economies, and the continuing support with simulating economic policies.  The growth profile evidences expansion of consumption and private investments, coupled with the increase in public expenditures. In particular, the improved tourism activity drove to the fast growth of exports in 2021 Q3.

Economic growth has led to the improvement of labour market indicators. In the third quarter, employment and the labour force participation rates have been climbing, while unemployment rate dropped to 11.3%.  In parallel, average wage rose by 6.9% at economy level and by around 8% to private sector.

Monetary and fiscal stimuli have provided a vital support to the recovery process, in terms of both economic growth and for safeguarding monetary and financial stability.

The accommodative monetary policy has contributed through the reduction of borrowing cost and growth of lending to economy. Interest rates on loans to both households and enterprises have remained at low levels, coupled with the stable exchange rate of lek against main foreign currencies.

The favourable financing conditions, growth of demand and the improved non-financing supply conditions have driven the expansion of credit portfolio to private sector.  In the fourth quarter, this portfolio grew around 9.9%, on average, the highest value of this indicator since 2011. Bank credit has served to finance consumption and investments as well as for meeting liquidity needs of both enterprises and households. Credit in lek has maintained a relatively high growth pace, in reflection of the monetary policy effectiveness and by mitigating the exchange rate risks to financial stability.

Current trends and supportive credit factors suggest its good performance in the future as well. These expectations are based on the high loan demand, the sound balance sheets of the banking sectors, the eased lending conditions, and in particular, the reduction of credit risk, as displayed by the further decrease - at 5.65% - of non-performing loans ratio in the end of December 2021.

Fiscal policy provided a positive contribution to the growth of aggregate demand over 2021, through the increase in investments and public consumption. Nevertheless, the fiscal stimulus has been reducing in the fourth quarter, in reflection of the slowdown in expenses and the fast increase of budget revenues.

The fiscal stimulus is expected to be withdrawn in the following years. The budget of 2022 suggests that fiscal policy has turned towards normalisation in the course of 2022, while public finances are expected to accelerate the consolidation pace in the following years. The Bank of Albania deems that to enhancing the sustained economic recovery it is indispensable to turn attention towards reducing public debt. This course helps the proper sequence of economic policies normalisation process and strengthens fiscal stability in the long term.

***

Our projections for the outlook remain positive. The Albanian economy is expected to progress along an upward trajectory in the next years.  Both domestic and foreign demands are expected to underpin economic growth, by reflecting the favourable financing conditions, improved confidence and private sector's balance sheets, and the demand growth in partner economies. In view of high levels in 2021, the economic growth rates are expected to be reducing in the course of 2022, and following. Nevertheless, expansion of demand is expected to be sufficient to ensure the increase in employment, in line with market supply, and the rise in wages, in line with our inflation target. In addition, the Bank of Albania assesses that expansion in the demand for goods and services will enable growth across almost all sectors of economy, although some of them will counter increased costs in commodities and energy products. 

Inflation is expected to remain above our target during 2022, in reflection of the shock stemming from increased prices in global markets. However, this shock is expected to provide temporary effects. Our analyses and those from international institutions suggest that market will normalise in the first half of this year, and the effect of external shocks on inflation will be reducing.

Inflation is foreseen to return sustainably to 3% target starting from 2023. The reduction of supply-side shocks and the good demand/supply balance in the Albanian economy will support the return and stability of inflation to target.

Nevertheless, the balance of risks to inflation remains titled to the upside. Upside risks mainly originate from the possibility of a faster or longer increase of prices in international markets, their embodiment to inflationary expectations, and a slower fiscal consolidation pace. Downside risks are related to a possible negative impact of the pandemic on the economic activity.

***

Judging on these projections, the Supervisory Council of the Bank of Albania deemed that the current monetary policy stance remains adequate for supporting the economy and inflation converging to target within 2023.

In this view, the Supervisory Council decided to:

• Keep the policy rate unchanged, at 0.5%;
• Keep the overnight deposit and overnight lending rates, unchanged at 0.1% and 0.9%, respectively.

The Supervisory Council assessed that the materialization of the baseline scenario - the further consolidation of the recovery, the continuous gradual increase of the domestic inflationary pressures, and the constrained supply-side shocks- would require a gradual normalisation of monetary policy in the course of 2022. This normalisation is expected to start in the next months and continue gradually over the medium -term horizon. Through this normalisation, the Bank of Albania will guarantee the achievement of our inflation target and establish the premises for a sustained economic growth in both medium and long term.

Also, the Supervisory Council considered that the materialisation of risk scenarios would require a revision of the monetary policy stance, by either accelerating the monetary policy normalisation, or conversely by pushing it further in time.

In any case, the Supervisory Council highlights that monetary policy stance will be consistent with the achievement of our inflation target over the medium term and will offer the necessary support for the consolidation of the economic rebound.