Governor Sejko: Statement to the Press Conference on the Monetary Policy Decision of the Supervisory Council of the Bank of Albania

Publication date: 06.06.2018


Dear representatives of the media,

In today’s meeting, the Supervisory Council of the Bank of Albania discussed the latest developments in the domestic financial markets. It focused, in particular, on the analysis of the rapid appreciation of the exchange rate, its expected implications for the inflation outlook in the medium-term horizon, and the assessment of the current monetary policy stance.

In the statement on 2 May, based on the analysis of underlying factors, the Supervisory Council assessed that the pace of exchange rate appreciation, until April, would have limited and short-lived effects on inflation.

However, the performance of the exchange rate in May showed a faster and further appreciation, exceeding the appreciation trend noted in the two previous years. It appears to reflect the formation of one-sided expectations – on the appreciating side of the exchange rate – by operators in the forex market.

Such expectations spring from information for an increase in foreign currency supply, mainly in response to the capital conversion of some banks, disbursement of a loan in foreign currency to a public company, and expectations for a good tourism season. As a result, the expectations have led to both an increase in supply and a decrease in demand for foreign currency.

The action of these factors – although assessed to be temporary – has resulted in a strong appreciation of the exchange rate. Such appreciation – which was identified as a risk factor in the Supervisory Council meeting in May – has strengthened downside pressures on inflation.

Our judgment on the situation and the economic and financial outlook in Albania has not changed. The development trend is expected to be positive, characterised by further economic growth, gradual convergence of the economy towards the equilibrium, and progressive build-up of domestic inflationary pressures. The Supervisory Council deems, however, that the transmission of the exchange rate appreciation to consumer prices decelerates the return of inflation to target. Also, albeit in the absence of changes in fundamental factors, one-sided and short-term expectations on the trend of the exchange rate appreciation, run the risk of being potentially transformed into stable and long-term expectations. The consolidation of such expectations and the creation of their self-fulfilling dimension may create a vicious circle, with a harmful impact on inflation and other economic indicators.

Based on the above information, the Supervisory Council assessed as necessary the further easing of the monetary policy stance. This assessment is fully consistent with our previous assessments and communications.

Against this backdrop, the Supervisory Council decided to:

  • Lower the policy rate by 0.25 percentage point, down to 1.00%;
  • Lower the overnight deposit facility by 0.15 percentage point, down to 0.10%;
  • Lower the overnight lending facility by 0.35 percentage point, down to 1.90%.

The increase in the monetary stimulus is expected to be accompanied by the further reduction of interest rates on loans and increase in the circulation of monetary assets in the domestic currency. Hence, it is expected to provide an additional impulse to aggregate demand, both through reducing the costs for financing consumption and investments and through the rebalancing of demand and supply for foreign currency in the financial market.

Furthermore, based on the need for creating adequate monetary conditions for maintaining price stability, and reflecting the reduction of scope for using the conventional monetary policy tool, the policy rate, the Supervisory Council decided the undertaking of foreign-currency purchase operations in the domestic foreign currency market. These operations will be carried out in accordance with the legal and regulatory frameworks.

Foreign-currency purchase operations are aimed to eliminate the temporary excess foreign currency in the market and decelerate the further appreciation of the exchange rate, which would hamper the achievement of our price stability objective. Hence, these operations will contribute to fulfilling and reinforcing the monetary stimulus, transmitted by means of lowering the policy rate. Moreover, they help the market to find the right price of the Albanian lek against other currencies, in line with the stable and long-term demand and supply balance for it.

Foreign currency purchase operations will be carried out for an adequate period, as necessary, with a view to achieving the relevant objectives.

The Supervisory Council finds it appropriate to underline that the exchange rate in Albania has, been, is and will continue to be a floating one, determined by demand and supply in the foreign currency market. Therefore, we invite once again all the operators of the economy and financial markets to avoid any unstudied, unhedged, and undesired foreign currency exposures.

The employment of foreign-currency operations is and will remain ad hoc, against the backdrop of specific circumstances arising from the need for monetary policy response and the narrowing of the scope for conventional instruments’ action.