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, 2 October 2024

Publication date: 02.10.2024

 

Ladies and gentlemen,

In today’s meeting, 2 October 2024, the Supervisory Council of the Bank of Albania reviewed and approved the Intermediate Monetary Policy Report, for the third quarter.

The information analysed in this Report suggests that the Albanian economy continues to settle on a positive development trend. The volume of economic activity, employment and wages have picked up, inflation remains at low levels and under control, balance sheets of private sector and banking sector are sound, financial markets are overall calm, while financing conditions remain accommodative.

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These developments are in line with our expectations. They also reflect - among others - the prudential monetary policy implemented by the Bank of Albania. This policy has succeeded to withstand the price shock originating from international markets, without jeopardising the positive economic growth trend and the financial stability of Albania.

Our updated projections suggest that the Albanian economy will continue to grow over the medium-term horizon, while inflation will return to our target in the next year. The Supervisory Council deemed these projections are consistent with the current monetary conditions in economy.

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

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Inflation of consumer prices has been relatively stable in July and August, standing close to an average level of 2%. The decline in inflation, over the first three quarters of year, has been dictated - at the largest extent - by the falling contribution of inflation in food items, and ultimately, in energy prices. On the other hand, inflation in other basket items, though at a slightly declining trend, appears more stable.

From the macroeconomic perspective, the fall in inflation over 2024 has reflected - at the largest extent - the fast reduction of imported inflation. This performance has been driven by both the reduced inflation in our trading partners and the strong exchange rate. In parallel, inflation generated from the domestic economic and monetary developments has been coming down. Though this decline is slower and the domestic inflationary pressures remain still at levels which are not consistent with our price stability objective. The relatively high demand for goods and services and the relatively fast growth of wages and production costs continue to fuel these pressures.

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According to INSTAT data, the volume of economic activity grew by 4.1% over the second quarter of 2024, standing on the upside of our expectations.  Available data suggests economic growth has settled on similar levels over the third quarter of 2024 as well. The expansion in consumption, investments and in the export of goods and services underpinned the economic growth.  On the other hand, the increase in imports and fiscal consolidation implemented during this period have provided a curbing impact on economic growth.  This demand structure has been reflected in the increased business across the sectors of services, construction and agriculture, while industry sector has recorded a contraction.

Our analyses suggest the Albanian economy continues to stand in a positive phase of business cycle. This performance is reflected at the high capacity utilisation rates of businesses as well as in the shortages noted in labour market.

The increase in the demand for goods and services has driven to the fast and stable growth in employment and wages in the Albanian economy. Despite statistical information on employment in the second quarter is still unavailable, administrative data suggests employment in non-agricultural private sector grew by 1.9% in the second quarter, standing at similar levels with the pace recorded in the first quarter. In parallel, the average wage in the private sector rose by 6.9% in 2024 Q2, continuing to exert pressures on the increase of production costs and final consumption expenditure.

From the macroeconomic perspective, the sound balance sheets of private sector, business and consumer confidence for the future, the simulating financial environment as well as the continuous increasing trend of tourism income have underpinned the expansion of the activity.

In this context, the implemented prudential monetary policy in the past two years, has resulted successful. The normalisation of monetary policy stance has established the premises for a better demand and supply balance in the economy, and has helped in containing inflation expectations. Also, the attention we have paid grading the monetary policy reaction, has enabled to maintain an accommodative financial environment.

Financial markets continue to appear relatively calm. Interest rates on deposits, loans and securities have been declining over the third quarter, reflecting both the reduction of policy rate in July, and the low risk premia in our financial markets. Also, credit terms and conditions continue to remain simulating, in both dimensioning of costs and in that of other conditioning, by illustrating a positive approach of banking sector to meet the needs of economy for funds. Last, the exchange rate - even in view of a considerable increase in seasonal foreign currency supply due to the tourism season peak - has been relatively stable over the third quarter, reflecting - among others - a higher level of foreign currency buys from the Bank of Albania.

Credit to private sector accelerated further in July and August. The growth pace peaked at 16.8% in August, standing at the highest levels for more than a decade.  This credit has continued to meet the needs of Albanian businesses and households for the growth of their consumption and investments, providing an elevated contribution in the expansion of economic activity. The expansion of credit portfolio in lek continues to be the main supporter to the growth of credit. Nevertheless, lending in foreign currency has been reactivated in the recent months as well.

Our forecasts for the outlook remain positive. Economic activity in Albania is expected to continue growing over the medium-term horizon, bolstered by the further expansion in both domestic demand and foreign demand. From the macroeconomic perspective, this forecast factorises the positive performance of confidence in economy, the improved financial balance sheets of businesses and households, and the simulating financial condition in economy.  The further expansion in the demand for goods and services is expected to be accompanied by a further increase in employment and wages.  On the other hand, inflation is expected to fluctuate on the downside of our target over the rest of year and to gradually return to the target in the first half of the next year.

Judging on the available information, the Supervisory Council assessed the balance of risks to these projections is overall flat.

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

  • Keep the policy rate unchanged, at 3.0%;
  • Keep the interest rate on overnight deposit unchanged, at 2.0%;
  • Keep the interest rate on overnight lending facility unchanged, at 4.0%.

The Supervisory Council judges that the current monetary policy stance is adequate for meeting our price stability objective in the future.

The Supervisory Council notes that the overall balance of medium-term pressures is gradually converging to our inflation target. 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.