PRESS RELEASE
Governor Sejko: Welcome Address to the Annual Conference of the Bank of Albania 2022

Honourable Madam Minister,

Dear Professor Monastiriotis,

Dear representatives of the banking system, ladies and gentlemen, dear guests,

It gives me great pleasure to welcome you to the 16th Annual Conference of the Bank of Albania. This conference is co-organised with the London School of Economics and Political Science (LSE). I am confident that, as in previous years, this conference will help us to better understand the origin and complexity of challenges we are facing, and identify the appropriate policies for tackling them. In this regard, I proudly note the high level of speaker expertise and the broad gamut of participants’ experience, which are a solid guarantee for the success of this conference.

This year's theme will focus on the sharp upsurge of global inflation and the problems it poses to policy-makers at both macro and micro economic levels. Nevertheless, central banks, as professional and visionary institutions, will make every effort for the agenda of the day to not eclipse the task of addressing problems which relate to the future. To this end, this conference will also address the increasing challenges we face, posed by rapid structural changes in the economy, society and in the surrounding environment.

As the Governor of the Bank of Albania, in this welcome address, I would like to share with you our vision on the presented themes, focusing on inflation and the measures we have undertaken in compliance with the price stability objective and briefly describing the long-term challenges to development.

 

Dear ladies and gentlemen,

The organisation of a conference focusing on inflation, by a central bank, may appear quite usual Nevertheless, to a field expert, the synchronised return of attention of central banks towards identification of the necessary measures and finding the most effective instruments for reducing inflation, marks a historical moment.

Relatively sustainable economic growth, low inflation and favourable financing conditions have characterised the global economy and financial markets for more than three decades. Economic and monetary stability - despite the occurrence of financial crises, either regional or global ones - is assumed as a fact in advanced countries, and an increasingly tangible reality in emerging economies. A period in economic history, embraced this reality and was named “The Great Moderation”.

Two powerful historical promoters have boosted the consolidation of economic and financial stability. On one hand, the globalisation of markets, the integration of Asian and Eastern Europe countries in production chains, and the decrease of geopolitical tensions, drove to an increased global aggregate supply, in turn bolstering economic growth and maintaining low production costs. On the other hand, the crystallisation of economic and political consensus on the role of central banks, the institutional and operational independence which they foster, and a focus on price stability, as the primary objective of monetary policy, provided an effective and reliable mechanism for controlling inflation and mitigating business cycles.

The strengthening of monetary stability and confidentiality of central banks, enabled the global economy to absorb an unprecedented monetary stimulus in the period of the global financial crisis and in the pandemic period. Central banks lowered financing costs, down to even a negative territory in certain cases, and rapidly increased their balance sheets. Monetary stimulus was decisive in mitigating the consequences of the crisis and in establishing the preconditions for economies to rebound. This stimulus was accompanied by increased public and private debt, but it was not translated into high inflation, once more illustrating the benefits of the Great Moderation.

Unfortunately, the military aggression of Russia against Ukraine has imposed a new reality. The geopolitical tension due to the conflict induced huge and unexpected problems in global supply chains for sensitive products, like food, commodities and energy, coupled with a fast increase in uncertainty across global markets. This shock coincided with the swift recovery of aggregate demand in the post-pandemic period and was reflected in a sharp soaring global inflation over 2022. Now, most advanced and emerging countries are facing exceptionally high inflation rates, not seen in decades.

Albania is part of this reality. Inflation surged sharply over 2022, reaching 8% in the third quarter, the highest level since 1998. Though inflation in Albania appears low, both in regional and European context, reflecting a strong and stable exchange rate and regulated prices of electrical energy to households, the inflation base has been picking up and expanding. Currently, the main basket items show an inflation rate above our 3% target. Imported goods and services are not the only items of the basket with either high or upward inflation rates, products which generate the most part of added value in Albania are also experiencing inflation hike.

The big challenge to governments, central banks, the financial markets and intermediaries, as well as to enterprises and households, is to identify the appropriate reaction against this shock.

• For governments, the economic and social tension which high inflation induces for the people with the most needs in society and on the most vulnerable segments of society, is articulated in increased demands for fiscal support. Nevertheless, meeting these demands turns into a problem, as long public finances are under pressure of uncertainty for the future and of increased costs of budget financing.
• For central banks, addressing the supply-side shocks with foreign origin poses a large dilemma, as these shocks have an adverse impact on economic activity and on price levels. In any case, the monetary policy remains aware of the fragile balance that exists between meeting the primary objective to control inflation and the secondary objective to lessen economic volatilities.
• For financial markets and financial intermediaries, high inflation rates push uncertainty up, making re-evaluation of exposure to risk and review of their development strategies necessary.
• Last, for enterprises and households, high inflation is a current challenge to living costs and business, in addition to a long-term challenge to their financial and business plans.

In these conditions, the Bank of Albania has identified the high inflation rate as the primary risk for: the sustainable and long-term growth of Albania; the increase of social welfare; and the social cohesion.  For this reason, the Bank of Albania has embarked on a gradual, but steady, normalisation of its monetary policy stance. The Bank of Albania has increased the policy rate four times during 2022, up to its current level of 2.25%, from an historical minimum of 0.5%. In our view, this normalisation is indispensable to guard the economic and financial equilibriums of Albania. It aims at establishing more adequate monetary conditions in view of our legal mandate of price stability and for inflation to return to target within a two year horizon - by simultaneously minimising the short-term and long-term volatilities in economic activity.

Three crucial considerations served us to ground this decision making. We deem that these considerations provide a consistent framework of analysis for determining the reactions of our monetary policy stance.

First, inflationary pressures in Albania appear strong and persistent. Though these pressures mostly originate from foreign supply-side shock, they have already begun to be transmitted into the cost structure of the Albanian economy and in the inflation expectations of economic agents. This conclusion is fully synchronised with the evolved thinking of almost all central banks and with the consensus of economic analysts.

The lingering and intensity of the foreign supply-side shock, the relatively stable demand for goods and services in Albania, and an increased capacity utilisation rate in the labour and capital market, have induced persistent inflationary pressures. The latter is accompanied by a rapid growth of employment and wages in the Albanian economy, in turn easing the transmission of further supply-side shocks.

For that reason, the Albanian economy risks experiencing a long period of inflation hikes, in absence of a monetary policy reaction.

Second, elevated and persistent inflation creates, in an incontestable manner, negative consequences for economic and social development. These consequences tend to be larger across emerging markets, like Albania. One of the biggest ironies of stability policies’ success, is that frequently economic agents forget about the motivation and benefits of these policies. For these reasons, allow me to spend a little time in refreshing our common memory on the negative impacts of inflation.

From an economic perspective, both global theory and practice testify that high inflation reduces economic growth rates while increasing volatilities in the long term. Heightened uncertainty coupled with inefficient distribution of financial resources in the economy result in negative inflationary effects, due to reduced signalling ability in relation to market prices. The increased attention of enterprises and households on financial protection - on the back of long-term investments in physical assets - and a surge in real financing costs - in reflection of financial savings - further strengthen the above-stated consequences.

From a social perspective, global theory and practice show that high inflation reinforces social inequality, as it falls harder on low-income groups, and may harm the political consensus and even the democratic institutions of a country.

In the context of emerging economies, soaring inflation intensifies the negative impact on financial stability, as it damages the public’s confidence in the national currency - and potentially - it hits its confidence in financial institutions.

Based on the above, persistent inflationary pressures and the long-term adverse effects of inflation compound sufficient premises for a reaction in monetary policy.  In addition, decision-making in this regard is also based on a third consideration.

Normalisation of monetary policy stance will not trigger undue negative effects in the Albanian economy and in its monetary and financial stability. Our projections suggest the Albanian economy will continue to grow in the medium and long term. Also, results from our simulations suggest that the banking system is quite resilient to relatively extreme economic and financial shocks. In a metaphorical manner, we have entered into this battle convinced that our cure will fight the disease - despite being bitter and unpleasant - it will not harm the patient.

This thought is based on complete, continuous and prudential analyses. The main findings of these analyses are as follows:

First, the Albanian economy enters this fighting with a positive development inertia. Economic activity recovered rapidly over the previous year and in the first half of 2022. Growth sources appear broad, and based on both domestic and foreign demand. Enterprises and households have relatively sound balance sheets, while labour market remains dynamic, characterised by a stable rise in employment and wages. In this regard, despite an expectation of decelerated growth pace in the near future, which is normal, economic growth is expected to remain in positive territory, while recession appears as a material risk only in extreme scenarios of developments in the external environment.

Second, unlike previous experiences in facing the shock, Albania already has a consolidated financial stability. Financial markets are relatively calm, despite moderate fluctuations in certain segments. Banking sector appear liquid, well-capitalised and profitable. In addition, financial security networks have been improved considerably, while public trust in the national currency and the banking sector has climbed to their highest levels. Last, but not least important, public debt remains contained and the concrete steps of the Government towards further fiscal consolidation provides an intensified ground for its stability.

In this context, I would like to highlight that the continuous reforms that both the Bank of Albania and Albanian authorities have undertaken in the financial field have yielded their results. In more concrete terms, consolidation in the system have provided for a more sound and competitive banking industry. The improved credit environment has driven banks to acquire a more positive approach towards lending, in turn becoming reliable supporters with funds to Albanian enterprises and households. In addition, financial security networks have been further fostered, through improved coordination among responsible institutions; a strengthened role of the Albanian Deposit Insurance Agency; and adoption of the resolution function from the Bank of Albania and establishment of a special fund for this purpose. At the same time, prudential supervision and regulation of banks has led to better risk management, by reducing the banking sector's vulnerabilities against unexpected shocks. Last, a strengthened payment infrastructure and enhanced financial education have increased the attention and participation of the public in the financial sector.

Third, I would like to emphasise that our monetary policy stance - throughout the normalisation process - will remain accommodative. This normalisation implies a reduction of monetary stimulus, but not a change of the simulating nature of this policy. In fact, our baseline scenario still does not forecast the adoption of a tightening stance in monetary policy. The monetary policy review aims at providing a better balance of risks in the economy.

 

Dear participants,

The analytical framework of the Bank of Albania, which I described above: the assessment of intensity and persistence of inflationary pressures, the identification of risks and assessment of their balance, coupled with an estimation of the cost and consequences of the intervention, provides a consistent guideline for decision making.

Returning once more to the historical context, I think that our task as monetary authorities is to maintain public confidence in the willingness and ability of central banks to safeguard price stability. The reaffirmation of this willingness and ability will preserve one of the two crucial premises of successful economic policies during the Great Moderation. Though other composite premises, globalisation, integration and reduction of geopolitical risk, do not fall in our control, price stability and the confidence of central banks is a relay race given to us from preceding generations and we should lead it forward.

Concluding, I would like to point out that the Bank of Albania has paid attention and will continue to be attentive to the long-term structural reforms that lie ahead.  It is clear, that our analyses and projections, and in turn our policies, are incomplete and inadequate without a full assessment of the role of climate changes, demographic trends, like ageing of the population and migration, as well as of the impact of  technological and financial innovation on the economy.

I am fully confident that in the course of this Conference, all the issues I posed above will be elaborated in greater detail.

I kindly invite you for complete and sincere discussions in this hall.

 

Thank You!

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