PRIMARY OBJECTIVE OF MONETARY POLICY
According to the Law “On the Bank of Albania”, the primary objective of the Bank of Albania’s monetary policy is to achieve and maintain price stability. Global theory and practice suggest that price stability is the greatest contribution that the central bank can make to sustain the long-term economic growth of the country. More specifically, by ensuring price stability, the Bank of Albania makes a direct contribution to sustaining the macroeconomic balances in the country, lowering the risk premium, promoting a stable economic growth and improving the long-term welfare, as well as safeguarding the financial system’s stability.
In quantitative terms, the Bank of Albania defines price stability as the keeping of the consumer price inflation rate at 3.0%, with a tolerance band of ± 1 percentage point around this central numerical figure. The inflation target will continue to be measured by the annual rate of change in the Consumer Price Index, which is calculated and published by INSTAT.
The Bank of Albania estimates that the monetary policy will continue to provide a positive contribution to the progress of the Albanian economy by targeting an inflation rate around 3.0%. Evidence from recent years has shown that this quantitative inflation target and the monetary policy employed to achieve it affect positively the level and stability of the economic growth rates. This specification helps guide the public’s inflation expectations and strengthen the Bank of Albania’s commitment to achieving this target.
The deviation of the medium-term inflation forecast from the target, based on a comprehensive analysis of economic indicators, will be the main indicator of the balance of inflationary pressures in the economy and of the desired monetary policy response. In addition, the Bank of Albania will use the broad money aggregate (M3) as an indicator of inflationary pressures in the economy.
In addition to measuring inflation as the annual change in the Consumer Price Index, the Bank of Albania uses other measures – namely core inflation, tradable and non-tradable inflation, and the inflationary expectations of economic agents - in order to improve the monetary policy decision-making process. These measures provide a more comprehensive basis for more pragmatic decisions.
OPERATIONAL OBJECTIVE OF MONETARY POLICY
The operational objective of the Bank of Albania’s monetary policy will be steering the short-term interbank rates close to the Bank of Albania’s key interest rate, set by the Supervisory Council, and smoothing their movements.
Steering the short-term interbank rates close to the Bank of Albania’s key interest rate aims at enhancing the efficiency and transparency of monetary policy, thus contributing to a better control of long-term interest rates in the economy. In addition, this operational philosophy of the Bank of Albania adds to a better management of short- and medium-term liquidity in the banking system.
This operational approach is considered optimal in a background of low inflation and in the presence of an unstable demand for money.In addition, the operational targeting of the interest rate allows for a clear signalling of the monetary policy stance.