BANK OF ALBANIA

PRESS RELEASE
Governor Sejko: Statement to the Press Conference on Monetary Policy Decision, 6 July 2022

Publication date: 06.07.2022

 

Dear Ladies and Gentlemen,

Today, on 6 July 2022, the Supervisory Council of the Bank of Albania reviewed and approved the Intermediate Monetary Policy Report.

 

The new information analysed continues to illustrate the impact that the military conflict in Ukraine has on the global and the Albanian economies. Surging commodity prices, tightening financial conditions and greater uncertainty have led to accelerating inflation rates and have started to weigh down on economic growth rates.  

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The revised analyses and our updated projections suggest inflation in Albania will continue to remain elevated during 2022. This inflation rate reflects – to the greatest extent - direct effects of the supply-side shock originating from international markets. Regardless, the impact of this shock can strengthen and be extended further in time, due to a relatively strong demand for goods and services in Albania.

 

Against this backdrop, the Supervisory Council judged that an accelerating inflation rate is the main risk jeopardising a sustained and long-term economic growth of Albania. In light of the above, the Supervisory Council decided to take further steps towards monetary policy normalisation. This normalisation aims at establishing adequate monetary conditions for controlling inflation in the medium term and signals our willingness to do whatever is necessary to safeguard our price stability objective.

 

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

 

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Inflation rose further in April and May, to 6.2% and 6.7%, respectively. These results were on the upper levels of our expectations.

 

Inflationary pressures have been broadening across categories. While the inflation rate in these two months has mainly reflected surging energy and food prices, these upsurges in prices were present across most items of the CPI basket.

 

From a macroeconomic perspective, inflationary pressures continue to be affected by high inflation rates across global markets - reaching the highest levels in the past four decades – and by a strong demand for goods and services in Albania.

 

According to INSTAT data, the Gross Domestic Product of Albania grew by almost 6% in the first quarter of 2022. This growth rate outturn was on the upper levels of our expectations and reflected higher consumption, private investments and exports of goods and services. On the other hand, lower public investments and higher imports have contributed negatively to growth.

 

Higher demand for goods and services was reflected into a further expansion of employment and wages in the first quarter, providing an additional factor to the accelerating inflation rate. According to official data, unemployment fell to 11.3% in 2022 Q1, while wages in the private sector expanded by 10.5%. While administrative measures undertaken to increase formalisation in the labour market have positively impacted the evolution of wages, the fast wage growth rate suggests that labour force shortages in the market are exerting increasing pressures on production costs in Albania.

 

Going back to the macroeconomic context, the economic growth rate in the first quarter reflected the private sector’s sound financial balance sheets coupled with favourable financing conditions.

 

The financial market in Albania continues to be characterised by contained risk premia, ample liquidity, a stable exchange rate and expanding credit. Our monetary stimulus has been transmitted into low funding interest rates to the private sector. In parallel, higher demand for loans and sound banking sector balance sheets have translated into stable credit expansion. Annual credit growth to the private sector has accelerated further to 13.8% in May. This growth is present across both the enterprise and household segments and has supported the financing of consumption and investments as well as working capital needs.

 

Going forward, the performance of the economy remains subject of serious challenges. The combined effect of elevated prices in international markets, the tightening financial conditions, and the expected economic slowdown in the Euro Area, coupled with lower household purchasing power, is expected to weigh in opposite directions on economic growth and inflation rates in Albania.

 

Despite the above, our updated baseline scenario forecasts suggest that the Albanian economy will continue to register solid growth rates over a medium-term horizon. Growth rates will decelerate when compared to the first quarter of year, but will nevertheless be sufficient to preserve the Albanian enterprises and households’ balance sheets.

 

Inflation, on the other hand, will continue to remain elevated in the coming quarters. Our baseline scenario projections indicate that the inflation rate will peak in the third quarter of the year, close to the current level, and will start decreasing progressively thereafter. Inflation is expected to return to target in the first half of 2024.

 

The baseline scenario projections forecast a gradual monetary policy normalisation going forward. The speed of normalisation will target an effective harmonisation of the intensity of the monetary stimulus with the intensity of medium-term inflationary pressures.

 

The balance of risks on inflation remains tilted on the upside. Particularly, additional strong supply shocks or strong second-round effects on prices would drive inflationary pressures to strengthen further. In contrary, a more negative economic growth in our trading partners or the conflict in Ukraine coming to an end quickly would reduce the inflationary pressures.

 

 

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Judging on the above, the Supervisory Council assessed 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 0.25 percentage points to 1.25%, from 1.0%;
  • Increase the overnight lending rate by 0.35 percentage points to 2.25%, from 1.9%; and
  • Increase the overnight deposit rate by 0.15 percentage points to 0.25%, from 0.1%.

 

In the Supervisory Council’s judgment, the monetary policy normalisation will create more adequate conditions to safeguard the price stability and enable the return of inflation to target within a medium-term horizon. At the same time, this normalisation will not jeopardise the conditions for economic growth in the medium term.

 

In addition, the Supervisory Council highlights that the materialisation of the baseline scenario will require the monetary policy normalisation cycle to continue over the coming quarters. 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.