BANK OF ALBANIA

PRESS RELEASE
Governor Sejko: Statement to the Press Conference on Monetary Policy Decision, 6 November 2024

Publication date: 06.11.2024

 

Dear Ladies and Gentlemen,

Today, on 6 November 2024, 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 and the main indicators of economic, monetary and financial stability are on a positive development trend. Economic activity has experienced a solid growth over the first three quarters of year, inflation rate stands at low levels, public debt and external debt have declined, and balance sheets of the banking sector remain sound, while lending is edging up in a progressive manner.

In the Supervisory Council’s view, the monetary policy implemented by the Bank of Albania has provided an important positive contribution in this performance. The gradual and prudential normalization of the monetary policy stance enabled the control and reduction of inflation, after the price-related shock springing from the international market over the course of 2022, without undermining- at the same time - the positive development trend of Albania and its financial stability.

This new information has resulted, overall, in line with our expectations, though economic growth has been on the upside and inflation level on the downside. The updating of our forecasts has not led to any change in the projections for the future.

 Overall, we expect economic growth to continue on the positive track and inflation to return gradually to the target in the next year. Nevertheless, this updating suggests the balance of risks on inflation are on the down side in the medium term.

Against this backdrop, in today’s meeting the Supervisory Council judges the easing of monetary policy stance as necessary.

Below, I will outline today's decision and explain in more detail the rationale behind it.

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In 2024 Q3, inflation of consumer prices averaged 2%, slightly down from the previous quarter. The decline in oil price and the slower increase in rental prices drove to the fall of inflation in this period. On the other hand, inflation of food prices recorded a slight increase.

From the macroeconomic perspective, the rapid decline in inflation over 2024 has reflected - at the largest extent - the fast reduction in imported inflation. This development has resulted from the slower inflation in our trading partner countries, the lower food and oil prices in international markets and the strengthened lek exchange rate. In parallel, inflation generated from the domestic economic and monetary developments has been coming down. Though this decline has been slower and the domestic inflationary pressures stand close to their medium-term averages.

The domestic inflationary pressures reflect the positive business cycle phase of the Albanian economy. In more details, these pressures continue to be fuelled by the fast growth in wages and labour costs, which have yielded an increasing impact on consumer final prices coupled with the relatively high demand for goods and services. This demand supports profit margins of businesses.

According to INSTAT data, the Albanian economy grew by 4% in first half of 2024. The preliminary available data for the second half of year suggest a similar performance to the previous six months.

The increase in consumption of households and the enhanced investments in economy underpinned - at the largest extent - the economic growth in 2024.  In parallel, the expansion in the export of services has had a positive impact, mainly on the back of the upsurge in tourism income, while the rise in imports, the decrease in the export of goods and the fiscal consolidation policy have had a restraining impact. This profile of the aggregate demand has led to a fast growth in the sectors of services and construction, while the industry sector has recorded a contraction.

From the macroeconomic perspective, the sound financial balance sheets of enterprises and households, the income edging up, the optimism for the future and the favourable financing conditions have driven economic growth to anchor on this positive trend.

Financial markets have continued to appear relatively calm over the course of the third quarter. Interest rates on deposits, loans and government’s securities have been slightly down, in reflection of both the eased monetary policy in July and the contained risk premia. Last, the lek exchange rate against the euro continues to show strengthening trends. The latter mostly reflect the improved balance of payments. Nevertheless, these trends have been decelerating compared to the previous year and their impact on the exchange rate has decreased due to a higher presence of the Bank of Albania in the foreign exchange market.

This economic and financial environment, coupled with the positive approach of banks toward clients, have driven to a fast credit growth over 2024. The annual credit growth stood at 16.8% in the third quarter, recording the highest level for more than a decade. Likewise previously, lending in lek and oriented to businesses and households to meet investment and house purchase needs, respectively, boosted credit expansion.  In addition, the non-performing loans ratio continues to stand close to minimum levels for more than a decade, by reflecting its good and stable quality.

No considerable changes have taken place in our expectations for the future from the previous report. In the baseline scenario we expect economic activity to grow further in a sustainable and continuous manner, accompanied by an increase in employment and wages. Economic growth pace is expected to fluctuate close the potential in the medium-term horizon, enabling a full utilisation of production capacities and a sustainable economic development. In parallel, inflation is expected to fluctuate close to current levels over the last quarter of year, and to increase gradually to the target over the course of next year.

The balance of risks to these forecasts is overall neutral. In particular risks to inflation have shifted to the downside in the short run, in presence of the continuous positive supply-side shocks, but they remain flat in the medium term.

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Taking into account these circumstances, the Supervisory Council decided to:

  • Lower the policy rate by 0.25 percentage point, down to 2.75%, from 3%;
  • Lower the overnight deposit facility by 0.25 percentage point, down to 1.75%, from 2%;
  • Lower the overnight lending facility by 0.25 percentage point, down to 3.75%, from 4%.

The Supervisory Council deemed that this movement will establish more adequate monetary conditions for controlling the impact that short-term supply-side shocks might have on inflation in the future. This decision displays the willingness of the Supervisory Council to react in a timely and symmetric manner against inflation movements both on the down side and up side of the target, in addition to concur with our previous communications to follow a data-dependent monetary policy.

The Supervisory Council notes that the overall balance of medium-term pressures is gradually converging to our inflation target in medium term. In this context, the next monetary policy decisions will continue to be depended on new information, and particularly on the analyses and assessments about the performance of the domestic inflationary pressures. These decisions will always be congruent with our price stability objective, consistent with the fiscal policy stance and the performance of the exchange rate.