PRESS RELEASE
Governor Sejko: Statement to the Press Conference on Monetary policy Decision, 3 August 2022

Dear Ladies and Gentlemen,

Today, on 3 August 2022, the Supervisory Council of the Bank of Albania reviewed and approved the Quarterly Monetary Policy Report.

The new information analysed suggests that inflationary pressures are broader and stronger than our previous assessments. This reflects the rapid upswing in prices in global markets, coupled with the strong and stable demand for goods and services in Albania.

Against this backdrop, the Supervisory Council decided to continue the normalisation process of monetary policy. This normalisation is necessary to control inflationary pressures and for inflation to converge towards the target, within the medium-term horizon. In this manner, the monetary policy will help safeguard both the monetary and financial stability and will establish the adequate conditions for a stable and long-term growth of the Albanian economy.

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

Consumer prices continued to increase in the second quarter. Inflation rose progressively during this period, peaking at 7.4% in June.

Inflationary pressures have been broadening. The increase of inflation mainly reflected surging prices of food, oil, and transportation. Nonetheless, the upswing in prices was present in a large variety of products, reflecting the transmission of supply-side shocks on the other items of the CPI basket as well.

The upward inflationary trend has reflected - to the greatest extent - the impact of the foreign demand shock. However, its spillover in the Albanian economy was favoured by a relatively strong      demand for goods and services and the upward revision of inflationary expectations. The performance of inflation in the future will depend on the dynamics and interaction of these factors.

The external environment remains challenging. The conflict in Ukraine and the sanctions imposed on Russia have engendered a swift upsurge in prices in the global markets, which have started to reflect in slower economic growth rates. In parallel, the financial conditions have been tightening as central banks have increased the policy rates, and the uncertainty across economic and financial agents has remained high. The projections for the Euro area suggest that inflation will peak at the second half of the current year, but the balance of risks remains tilted on the upside.

In the light of the above, the Albanian economy has shown a sustainable performance in the first half of year. The volume of economic activity grew by 6% in the first quarter of 2022, and the indirect indicators suggest a further growth in the second quarter. This performance reflects the sound financial balance sheets of households and enterprises, the operational flexibility of the private sector, and the resilience of the Albanian financial system against shocks.

Economic growth was driven by the expansion in households‘ consumption, private sector investments, and in the exports of goods and services. On the other hand, the upsurge in prices in international markets has increased the import bill, whereas the fiscal policy has been consolidating. 

The favourable financial conditions in Albania have underpinned growth of the aggregate demand. The stimulating monetary policy has created a financial environment with low interest rates, ample liquidity, and contained risk premia. The demand for loans in Albania continues to remain high, while the banking sector continues to provide favourable lending terms and conditions. Consequently, credit growth to the private sector recorded 13.8% in June, maintaining the positive trend of the previous year. Simultaneously, credit portfolio quality remains sound, illustrated also by the non-performing loans ratio, which remains at the lowest levels over the last decade.

In parallel with these developments, lek exchange rate to euro has appreciated over the last two months. This appreciation reflects the high inflow of foreign currency as a result of the positive tourist season, while it mitigates that part of the supply shock which originates from the external market.

The expanded demand has led to a better utilisation of the production potential. In particular, the labour market continues to be characterised by an increase of employment, lower unemployment, and a swift increase of wages in the private sector, whereas enterprises report a higher utilization rate of production capacities. These developments are encouraging signals that the economy will continue to grow over the coming period.

The baseline scenario forecasts suggest that economic growth will remain in the positive territory over the medium-term horizon. The expansion of economic activity will continue to be underpinned by: a higher domestic and external demand; sound financial balance sheets; and an increase of employment, wages, and loans.

Inflation is expected to remain elevated over 2022 and will decline thereafter. In the absence of new shocks, price stabilisation in foreign markets is expected to mitigate inflationary pressures in Albania. Concurrently, our monetary policy normalisation will establish more adequate financial conditions for a sustainable economic growth and for inflation edging down. Inflation is expected to converge towards our 3% target in 2024 H1.

These projections remain highly uncertain. Not least, inflationary risks remain tilted on the upside, while those related to economic growth on the downside.

***

Judging on the above, the Supervisory Council continues to assess that the elevated inflationary pressures are the primary risk to a stable long-term growth of the Albanian economy.

As such, and in full concordance with safeguarding our price stability objective, the Supervisory Council decided to:

• Increase the policy rate by 0. 5 percentage points to 1.75%, from 1.25%;
• Increase the overnight lending rate by 0.5 percentage points to 2.75%, from 2.25%; and
• Increase the overnight deposit rate by 0.5 percentage points to 0.75%, from 0.25%.

In the Supervisory Council’s judgement, the monetary policy normalisation will create more adequate conditions to safeguard the price stability and enable the return of inflation to target over the medium-term horizon. At the same time, monetary policy will remain accommodative throughout the normalisation process, and it will not jeopardise the conditions for economic growth.

The Supervisory Council highlights that the materialisation of the baseline scenario will require the monetary policy normalisation cycle to continue over the coming quarters as well. In this scenario, the normalisation speed will be gradual, but in any case, consistent with our medium-term inflation target.

The Supervisory Council will carefully monitor the inflationary pressure dynamics going forward.  It stands ready to intervene in a timely manner and with the adequate force to guarantee the price stability in Albania.