BANK OF ALBANIA

PRESS RELEASE
Governor Sejko: Statement to the Press Conference on Monetary Policy Decision, 3 November 2021

Publication date: 03.11.2021

 

Dear Ladies and Gentlemen,

Today, on 3 November 2021, the Supervisory Council of the Bank of Albania reviewed and approved the Quarterly Monetary Policy Report.

The new information analysed in this Report suggests that the Albanian economy continues to recover from the shocks originating from first the earthquake and then the pandemic. This performance is reflected in: higher economic activity; expanded employment and higher wages; improved private sector’s balance sheets; and a steady growth of bank lending.

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In addition, the new information shows an increase of inflation, both in external and domestic environment. The upswing in inflation was mainly driven by shocks generated from demand and supply bottlenecks in international markets. The latter are expected to be temporary and their impact on inflation is expected to be transitory. On the other hand, despite edging up, domestic pressures on employment, wages and inflation are still moderate.

Our forecasts on the economic outlook remain positive. Our projections suggest that the Albanian economy will continue to grow in the medium-term, supported also by the monetary stimulus, generating thus the conditions for inflation to converge to target within the following year.

Against this backdrop, the Supervisory Council assesses that the current monetary policy stance remains adequate.

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

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The new information analysed in this Quarterly Report resulted on the upside of our expectations.

Inflation has trended upwards in the third quarter, averaging 2.4%. This performance reflected - at a larger extent - supply-side shocks from the surge in prices of food, energy, oil and transport costs in international markets.

The effect of shocks on inflation is expected to be present in the current quarter and during the first half of next year, while it is expected to dissipate thereafter. This assessment is based on the consensus of international institutions and market expectations. According to this consensus, prices of oil, energy and food items are expected to stabilise and then decline in 2022, hence reducing pressures on production costs and on consumer prices in Albania.

Domestic inflationary pressures have strengthened even if only gradually and in a contained manner. This dynamic reflects the still insufficient expansion of employment, wages and production costs as well as the expectations of businesses and financial markets for a moderate inflation.

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Economic activity in Albania is continuing its recovery. According to INSTAT data, the Albanian economy grew by 17.9% in the second quarter of 2021. The available indirect data signal a further expansion of economy in the third quarter.

The easing of containment measures, improved confidence in the economy, better external environment and expansionary macroeconomic policies have all supported the economic rebound.

This recovery was broad based. In terms of aggregate demand components, it reflects the increase in consumption and private investments, expansion of exports of goods and services, and the positive contribution - although receding – from the fiscal stimulus. In sectoral terms, it reflects the growth across almost all sectors and branches of production and services, except of agriculture.

The expansion of the demand for goods and services has enabled the return of economic activity to both pre-earthquake and pre-pandemic levels.  This recovery, present at the economy and sectoral level, suggests that the potential output of the country has remained relatively unaffected by the adverse shocks and their medium-and long term impact on the economy will be relatively low.

Nevertheless, economic recovery has been - so far - partially reflected in the labour market.  Although the unemployment rate declined at 11.6% in the second quarter, it still remains above pre-pandemic levels. The slower upturn of employment and wages is a known phenomenon in the recovery process. Nevertheless, it dictates contained pressures on inflation and requires a continued accommodative monetary policy stance.

The monetary policy stimulus has continued to be transmitted into low financing costs and favourable lending conditions. Financial markets are calm and characterised by normal trading volumes, contained risk premia and low interest rates. In addition, the lek exchange rate is stable, by recording contained fluctuations, in line with typical seasonal factors.

This financial environment has enabled a fast and stable growth of credit to the private sector.  Bank credit portfolio grew by 8.9% at the end of the third quarter, driven by the expansion of loans in lek, of loans for investment purposes and mortgages. The positive performance of lending has reflected the expansion in both demand and supply. The latter is affected by both sound balance sheets of the banking sector, where the reduction of the non-performing loans ratio to 6.5% in September stands out, as well as the pro-active approach adopted by the banking sector towards lending.

Fiscal policy has maintained its expansionary stance over 2021, although the intensity of the fiscal stimulus has receded in recent months. The budget deficit decreased to 2.7% of GDP in the third quarter, reflecting a faster increase of revenues relative to expenditures.

The fiscal stimulus is expected to be withdrawn in the following years. The Bank of Albania deems that the strengthening the sustainability of the economic recovery makes it necessary to reserve increased attention towards fiscal consolidation. This fiscal consolidation increases policy space to withstand potential adverse shocks in the future, reduces risk premia in financial markets and strengthens the macroeconomic stability of Albania.

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Our baseline scenario projections remain positive. According to this scenario, the economy is forecasted to record a fast growth over the course of 2021, and continue to grow at a slower, but stable pace, in the following years. This growth will reflect improved economic confidence and balance sheets of private financial sector, increased foreign demand and a favourable financial environment. The expansion of demand for goods and services will drive to the rise of employment, wages and profit margins, in line with our inflation target.

In this scenario, the effect of supply-side shocks is expected to be transitory and inflation is expected to return to our 3% target in the course of 2022.  In addition, this scenario is consistent with a balanced economic policy mix in the future: fiscal consolidation is expected to accelerate in the following years, while the monetary stimulus will continue, although at a gradually reduced intensity.

The balance of risks appears tilted on the upside in the short term and balanced in the medium term. On the one hand, a faster or prolonged increase of prices in international markets and a slower consolidation pace pose upside risks to inflation. On the other, a slower recovery of global economy poses downside risks to inflation.

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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 2022.

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 and domestic inflationary pressures - would require a gradual normalisation of monetary policy in the following quarters. In addition, the improved liquidity situation in banking sector will enable the adoption of traditional auctions of liquidity injection into the banking sector, starting from the first quarter of the next year. The gradual reduction of monetary stimulus 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 both bringing forward in time and accelerating the monetary policy normalisation in case upside scenarios materialise, or conversely by pushing it further in time and decelerating the intensity of normalisation, in case downside scenarios materialise.

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.