BANK OF ALBANIA
PRESS RELEASE
Governor Sejko: Statement to the Press Conference on the Monetary Policy Decision of the Supervisory Council of the Bank of Albania, 18 December 2024
Publication date: 18.12.2024
Ladies and gentlemen,
In today’s meeting, 18 December 2024, the Supervisory Council of the Bank of Albania reviewed and approved the Intermediate Monetary Policy Report.
Although available information is partial, the new analysed information suggests that economic activity in Albania has performed positively in 2024 H2. Economic activity has continued to grow, inflation remains low and contained, financial markets appear relatively calm, while credit grew at a high pace.
The Supervisory Council reaffirmed its judgement that the monetary policy of the Bank of Albania has played a crucial role in this performance, through controlling and reducing inflation, without undermining the positive economic growth trend and the financial soundness indicators of Albania.
The updated projections do not bring any change to our expectations for the future. The Albanian economy, in the baseline scenario, is expected to continue growing at a stable place and close to the potential, inflation is expected to gradually increase towards the target in the next year, while the balance of risks appears neutral.
Against this backdrop, the Supervisory Council judges that the current monetary policy stance remains adequate.
Below, I will outline today's decision and explain in more detail the rationale behind it. ]
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Consumer price inflation averaged 2% in October and November, a similar level with the third quarter. This performance resulted in line with our projections. The stability of headline inflation reflected the increased inflation in food items and the reduced inflation in rent, oil and durable consumer goods. Inflation in other basket items did not experience any significant change.
From the macroeconomic perspective, the performance of inflation over 2024 reflected the fast reduced imported inflation, the gradual normalisation of expectations on the price surge from economic agents, as well as the relatively stable levels of domestic inflation. In a more detailed perspective, the similar performance of inflation in our trading partners, the low commodity prices in international markets and the further strengthening of the exchange rate have driven the decline in imported inflation, in the first quarter and its low levels, over the rest of year. On the other hand, the relatively stable inflation levels generated within our economy have reflected the high demand for goods and services and the fast increase in wages and costs of production.
Official data on the economic growth levels and its contributors are still unavailable.
However, indirect monetary, fiscal and external sector data suggest the Albanian economy has continued to grow over the second half of year, at a similar pace with the first half. Overall, the economic growth in 2024 H2, is assessed to have maintained similar features - both from a sectoral perspective and from an aggregate demand perspective - with 2024 H1. The expansion in consumption, investments and service exports has fuelled this growth, which in turn has been reflected in the expansion of the activity in services and industry sectors.
The expanded demand for goods and services has continued to be reflected in the rise in wages and employment. According to INSTAT data, the average wage in private sector grew by 5.4% in 2024 Q3, slightly slower compared to 2024 Q2. This slowdown displays easier pressures in the labour market and is a premise for a more stable performance of prices and inflation in the future.
From a macroeconomic perspective, the increase in disposable income, the sound financial balance sheets of businesses and households, the favourable financing conditions and the optimism for the future continue to underpin the economic growth. This broad base of factors suggests that the positive trend will continue in the future as well.
Financial market has reflected the monetary policy signals, displaying low risk premia and favourable interest rates. The monetary policy easing has impacted all segments of market, reduced the costs of financing to the Government, Albanian households and businesses. The favourable financing conditions, in addition to the monetary policy, also indicate the positive approach of banking sector towards lending. The ample liquidity, the low credit risk and the positive climate of confidence in economy have boosted this approach.
Meanwhile, foreign exchange market has continued to be characterised by appreciating pressures of lek against other currencies. The analysis of the balance of payments data for the third quarter, confirms that the growth in foreign currency inflows from tourism, remittances and foreign direct investments continue to fuel these pressures. Nevertheless, the appreciation pace of the exchange rate has been reduced, as a result also of the increased interventions by the Bank of Albania in foreign currency purchases.
Over the course of 2024, the accommodative financial environment and the stable demand from households and businesses have generated a dynamic growth of credit. In October 2024, credit to private sector grew by 15.4%. Developments in lending continue to exhibit certain positive features. First, credit growth is broad-based, meeting the financing needs of both households and businesses. Second, credit in lek is growing at a faster pace than credit in foreign currency, increasing the share of the lek portfolio in the total credit. This trend enhances the effectiveness of monetary policy and mitigates risks to financial stability. Third, the quality of credit remains good, as illustrated by the non-performing loans ratio to total loans, which remains at its lowest levels since 2008.
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 the same vein, inflation is expected to rise gradually towards the target over the next year.
The balance of risks to these forecasts is overall neutral.
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Taking into account these circumstances, the Supervisory Council decided to:
- Keep the policy rate unchanged, at 2.75%;
- Keep the interest rate on overnight deposit unchanged, at 1.75%;
- Keep the interest rate on overnight lending facility unchanged, at 3.75%.
The Supervisory Council deems that the current monetary conditions are adequate for inflation returning to the target in the next year, and provide a good premise for preserving inflation in the medium-term horizon.
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.
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Ladies and gentlemen,
In line with tradition, in this last meeting of the calendar year, I would like to take the opportunity to provide a brief summary of the work and achievements of the Bank of Albania in 2024.
Our work is focused on: guaranteeing monetary stability and supporting the financial stability of Albania; developing financial markets and payment instruments; supporting the European integration process; addressing the long-term development challenges of the country; as well as improving our internal work strategies, policies, and procedures.
Allow me to brief you on some of them.
First, our monetary policy has succeeded in containing inflationary pressures. Average inflation in 2024 has resulted close to 2.2%, more than 50% lower from the past year, and close to our price stability objective.
Second, banking sector remains sound, with good indicators of liquidity, capitalisation and profitability. This sector guarantees the preservation of the savings of Albanian households and has provided the economy with the necessary funds for the expansion of consumption and investment. In this context, it is worth emphasizing that lending has made a positive qualitative step in 2024, recording the fastest expansion rate in the last decade.
Over the course of 2024, the Bank of Albania has worked on further improving its supervisory and regulatory framework. Some of the main achievements are:
- the application for formal certification of equivalence with European Union standards, for which we are awaiting the testing process;
- completion of work on "open banking" and the launching of licensing for this activity;
- implementation of the strategy for green finance; and
- continuation of efforts to prevent money laundering through the revision of the regulatory framework and continuous monitoring of the level of compliance with it.
Third, the Bank of Albania has ensured the efficient operating of payment systems and has achieved a number of positive developments in the development and further sophistication of these systems. Beyond the development of the domestic market, membership in SEPA on 21 November 2024, crowned one of the greatest and most significant achievements in this area. This decision marks a political achievement at the national level as a concrete step towards integrating the country into the European market.
Fourth, the Bank of Albania has continued to be an institutional frontrunner in the European integration process. Next, it is being worked in the framework of opening two additional clusters, which include chapters addressing issues such as monetary policy, banking services, and payment systems.
Fifth, the Strategy for Financial Education and Inclusion and the Mid-term Green Strategy 2023-2025 mark two other major achievements of the Bank of Albania over the past two years. The purpose of both strategies is, on one hand, to establish a safer and fairer financial environment by promoting access and full inclusion of citizens in the system, and on the other hand, to lay the foundations for a sustainable financial system, contributing to a better future for all.
Last, I would like to highlight that the Bank of Albania has worked and progressed across all other aspects of its activity, for: improving the internal management processes and practices; issuing and managing coins and banknotes; foreign exchange reserves management; financial statistics; communication with public and with all the economic and society actors; financial education; scientific research; etc.
Concluding, I re-affirm that the Bank of Albania has been and will remain committed to fulfilling on a timely manner and with quality its mission: the establishment of an increasingly sound and effective monetary and financial system for the sustainable and long-term growth of Albania.
Thank you for being an essential part of our journey and work. Wishing you a New Year full of prosperity and professional successes!