PRESS RELEASE
Governor Sejko: Statement to the Press Conference on Monetary Policy Decision

Ladies and gentlemen,

Today, on 20 March 2024, the Supervisory Council of the Bank of Albania reviewed and approved the Intermediate Monetary Policy Report.

The new economic and financial information analysed in this Report exhibits that the Albanian economy has continued to grow in the last two quarters, the economic and financial balances of Albania have improved, while inflation has declined rapidly, by even exceeding our expectations.

The Supervisory Council deems that the normalisation of the monetary policy stance has provided a positive contribution in withstanding shocks, through mitigating the domestic inflationary pressures, reducing risk premia and boosting the smooth functioning of money market.

Projections for the future remain positive. The update of our projections suggests that the volume of economic activity will grow further, while inflation will fluctuate close to our 3% target.

Judging on this information, the Supervisory Council assessed that the monetary policy stance remains adequate for guaranteeing price stability in the medium term.

Inflation of consumer prices has declined rapidly in the first two months of the year. In more concrete terms, inflation fell from the average of 3.9% in the last quarter of last year, to the average of 3% in January and February of the current year. This fall reflected the fast reduction of inflation in food items, while inflation of other items showed more stability.

From a macroeconomic perspective, the reduced imported inflation impacted the fall in inflation.  In particular, the swift decline of foods inflation reflected both a regional and European phenomenon, driven by the surge in supply for these products. Based on the current information, the effects arising from this shock on inflation will continue to be present for several months to come.

On the other hand, domestic inflationary pressures - though trending downwards - are more stable.  Core net inflation – an indicator which avoids the impact of the most volatile price movements of the basket and, as such, is a better gauge of medium-term inflationary pressures, resulted around an average of 3.3%, maintaining a rate equal with the one in the previous quarter. This performance suggests domestic inflationary pressures continue to remain relatively high, due to the solid demand for goods and services and the pressures originating from the labour market.

Analysis of available data suggests economic activity in Albania has continued growing. The expansion in consumption and private investments, the increase in the export of services and the acceleration in the realisation pace of public expenditure have nourished economic growth. Their expansion has been underpinned by the increase in disposable income of households, the sound financial balance sheets of businesses, the still simulating financial environment, as well as the positive expectations for the future.

The solid demand for goods and services keeps the economy in a positive business cycle. This performance is reflected in the continuous growth of employment, decrease of unemployment and the fast increase of wages. According to INSTAT data, employment in economy grew by 0.6% in the fourth quarter of 2023, wages in private sector increased by 11.6%, while unemployment rate stood close to the historical minimums, at 10.7%. The expansion of employment and wages has continued to support consumption growth, but - on the other hand - it also keeps domestic pressures on inflation high.

Financial markets appear calm, characterized by ample liquidity, low risk premia, stability in interest rates and exchange rate, as well as further credit growth. The prudential normalisation of monetary policy stance by the Bank of Albania played an important role in this regard. This normalisation has led to an overall increase in interest rates, by establishing the premises for a more balanced performance of demand and supply for funds in the economy. On the other hand, the attention we have paid regarding the pace of this normalisation, has maintained the overall financial conditions in Albania still stimulating.

Credit to private sector expanded further in reflection of this performance. Credit to private sector expanded by 10.6% in January, pursing the positive trend of recent months. This credit has met the needs of businesses and households for funds, displaying an increasingly high orientation towards the domestic currency as well as preserving a quite good quality of credit portfolio.

The update of forecasts re-affirms our expectations for economy growing further and suggests inflation stabilising around our target during 2024 and beyond.

Economic growth will continue to be supported by the financial soundness of the private sector, the positive dynamics in the labour market, as well as a stable financial environment. The surge in family consumption, investments and tourism will bolster economic growth. Pace of economic growth is expected to decelerate somewhat in the current year, and then accelerate in the next period, following the same path of the economy’s potential.

On the other hand, inflation is expected to fluctuate around the target in the next period. This forecast factors in our expectations for a more balanced performance of demand and supply in the economy, for the stabilization of prices of food items in the domestic market, as well as for the normalisation of inflation in the external environment. At the same time, the analysis update suggests that the balance of risks on inflation performance is neutral. In particular, the possible intensification of geopolitical tensions could lead to an increase in inflation, while the further decline in food prices in both domestic and foreign markets could drive to lower inflation rates.

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Judging on the above, the Supervisory Council decided to:

• Keep the policy rate unchanged, at 3.25%;
• Keep the interest rate on overnight deposit facility unchanged, at 2.25%; and
• Keep the interest rate on overnight lending facility unchanged, at 4.25%.

The Supervisory Council considers that the current monetary policy stance is adequate to guarantee price stability in the medium term. Also, the Supervisory Council points out that future monetary policy decisions will be based on the new information. These decisions will always be oriented with regard to our price stability objective, as well as consistent with the fiscal policy stance and the performance of the exchange rate.