Questions and answers at the Governor's press conference on 24 December 2018

Publication date: 24.12.2018


Question: In your latest report to the Parliamentary Committee on Economy and Finance, you stated that the Bank of Albania was monitoring whether there would be a new equilibrium of the euro-lek exchange rate. Since then, the euro has depreciated by almost two lek per unit. In the Supervisory Council's report, you said that you stand ready to consider the interventions in the market once again. Vis-à-vis a depreciation [of the euro] by two lek, and downward inflation undershooting the target, my first question is what would be considered as a level at which the bank would feel obliged to intervene? And a second question, in the summer we considered the flows of tourism as a factor that led to the depreciation of the [euro] exchange rate, what are the factors that currently impact depreciation?

Governor: Regarding the exchange rate, it is known that our national currency has appreciated against the euro. For this reason, we are monitoring the performance of the exchange rate, and we are analysing it, as we have done during the past years. The appreciation of the lek has started years ago in a steady pace, but at certain times this appreciation was more pronounced, as it was mainly influenced by seasonal factors, exactly like our current situation; we are at the peak of a seasonal factor. During the summer and in December the domestic currency is appreciated as a result of strong foreign currency inflows. In addition, there is a number of other factors that affect the exchange rate. We have reported those factors and have continuously informed you about them. These factors are related to the foreign direct investment, exports, and remittances, especially during the summer, which have sufficiently justified the appreciation of the exchange rate.

There have been other specific factors obliging the Bank of Albania to start an intervention program, especially during the summer. These factors were the conversion of capital from several banks and a major loan from the European Bank of Reconstruction and Development, which amounted to nearly EUR 300 million to be converted at a certain point. This amount of foreign currency pressured the exchange rate and increased the financial system’s expectations at that exact moment.

According to our analysis, we assessed that the exchange rate depreciation would affect the achievement of the inflation target and so we were forced to intervene. The Bank of Albania intervenes when the inflation target is affected and when the market experiences disturbance. In June, we had both of these elements and, therefore, we took that decision.

Presently, the exchange rate does not show disturbance and the market functions as it normally does. Our exchange rate is a result of the demand-supply in the foreign exchange market, i.e. a normal behaviour.

I would rather not mention this figure (when the inflation is at risk), as a level, as it can create a psychological effect and become a cause for speculations in the foreign exchange market, but we are certainly at a lower level compared with the previous level, with regard to its impact on inflation. Certainly, if there are disturbances according to the definition of the law and regulations of the Bank of Albania, and if the exchange rate affects the level of inflation, then the intervention program will continue.

We have a free floating exchange rate regime in Albania, and we do not want to change it. The Bank of Albania does not intervene to protect the interests of particular groups that lose or win, because it makes no sense at all. We only look at the macroeconomic parameters.

We have made significant purchases during the year, and these purchases are reported quarterly. We have bought over EUR 400 million in total, not only because of the rate but also for foreign exchange reserves reasons. Of course, this is a significant amount to withdraw the euro surplus in the market and to maintain the equilibrium at the exchange rate level in order to achieve the above mentioned elements, namely the inflation target or the prevention of disturbances.

The Bank of Albania does not control the entire amount of the euro in circulation, as it enters in formal and informal channels, and no central bank would be able to control it. Certainly, through all our analyses as well as also through other studies, including empirical ones, we try to judge and evaluate the extent of the impact of this volume in circulation in order to make our forecasts for the future for economic growth and to formulate the monetary policy, to take into account how we will use the monetary policy instruments. If we have an impact on the rate, the figures will tell us whether to intervene or not.

I can't say at what level the rate will be, because, this is a new equilibrium and we cannot predict what level the rate will be. We prefer stability for the financial markets, including the foreign exchange market. The rate will of course fluctuate, because it is an indicator of the economy of the market, and in a free regime the rate fluctuates. Less fluctuations would mean a better situation as economic agents would be more protected. Economic agents can take measures to hedge against the exchange rate risk, by defining it in their contracts. Swap or forward contracts are well known methods by international institutions, also used by economic agents, mainly those operating in the field of exports. This is the only way to avoid the exchange rate risk.

The central bank is naturally standing ready to take all the measures in order to have economic growth, increase in Albanian exports, increase in the wealth of Albanian citizens; and the exchange rate should positively, not negatively, affect all these factors. But, we have to understand that the economy is highly euroised, at the business and individual level, and any fluctuations in the exchange rate, both downward and upward, would affect a part of the population. As long as the exposure to the euro is at 50%, in the case of appreciation, businesses or individuals whose income is in euro will be affected. On the other hand, those whose income are in lek will be affected. In previous conferences on the exchange rate I have pointed out that the lek-foreign exchange rate in Albania over the last decades has shown consistency and this has been a good element. The Bank of Albania, over the past decades, has managed well the exchange rate risk, but in the current situation there are large foreign currency inflows from many directions.

Our analysis continues because it is in accordance with the performance of the rate over the time, and we will intervene in case the above-mentioned parameters are affected.