Gent Sejko: Statement - press conference on monetary policy
decision
Statement by Mr Gent Sejko, Governor of the Bank of Albania, to the press conference
on Monetary Policy Decision, Tirana, 2 August 2023.
* * *
Dear ladies and gentlemen,
Today, on 2 August 2023, the Supervisory Council of the Bank of Albania reviewed and
approved the Quarterly Monetary Policy Report.
The new information analysed in this Report has resulted, overall, in line with our
expectations and with the development trend across our trading partners. Inflation
continued to decline in the second quarter, in reflection of the lower foreign pressures,
the strengthened exchange rate and the reduced expectations on inflation. In parallel,
economic activity in Albania has been expanding.
Available data suggest that the normalisation of monetary stance have played a positive
role in this picture, by helping in keeping inflationary pressures under control and
enabling the smooth operation of financial markets.
The updated projections for the future reconfirmed our previous expectations. The
Albanian economy - based on the current trends and their supportive factors - is
expected to continue to grow in the next years, while inflation is expected to turn to the
target by mid-next year.
In light of the above, the Supervisory Council decided to maintain the monetary policy
stance unchanged.
[Below, I will outline today's decision and explain in more detail the rationale behind it.]
***
Inflation of consumer prices averaged 4.6% in the second quarter, down by almost 2
percentage points from the previous quarter. This fall reflected the lower inflation rates
of food items, particularly unprocessed foods, coupled will lower inflation rates of
nonfood consumer goods, particularly of oil. On the other hand, inflation of other basket's
items showed more stable.
From the macroeconomic perspective, the pace of price increase decelerated - mostly -
on the back of the fall in imported inflation, in reflection of inflation coming down in our
trading partners coupled with the exchange rate strengthening. On the other hand,
domestic inflationary pressures continue to appear relatively robust and stable. The
relatively elevated demand for goods and services fuelled these pressures. In addition,
this demand has been accompanied by a fast growth in both wages and production
costs, while maintaining profit margins high.
The available indirect data suggest that the Albanian economy, after the 2.7% growth
recorded in the first quarter, continued to grow in the second quarter of 2023 as well,
even with a higher pace compared to the previous quarter. Following the trends noted
in the last two years, economic growth has been guided by the expansion in
consumption and private investments, as well as by the rise in the export of services,
particularly in tourism income. On the other hand, the increase in imports, the decrease
in the export of goods, and fiscal consolidation provided a restrictive impact on the
growth.
The continuous surge in the demand for goods and services has pushed the economy
into a positive phase of the business cycle. The latter is reflected in the improved
financial situation of businesses and consumers, increased employment, and - in face
of labour market shortages - in wages and production costs picking up rapidly. In
particular, wages in private sector continue to relatively hike rapidly, by 9.5% on
average in the first quarter, while unemployment rate stands close to the lowest
historical levels. This dynamic suggests that the domestic inflationary pressures are
relatively elevated.
From the macroeconomic perspective, the improved business and consumer
confidence, the further increased disposable income, the boosted attention towards
Albania as a tourism destination, and the still favourable financing conditions
underpinned the economic growth.
The pass-through of monetary policy stance normalisation to financial markets has
driven to an overall increase of interest rates on deposits, loans and government's
securities. The overall monetary and financial conditions, though trending up, still
remain simulating for the economic growth. Credit to private sector, in response to
them, has continued to grow, thus meeting the demands for funds from Albanian
enterprises and households, in turn bolstering the expansion in consumption and
investments. The good liquidity and capitalization indicators of the banking sector, the
good performance of loan portfolio quality, as well as a still positive approach of banks
towards lending, suggest the banking sector will continue to support economic growth in
the future.
On the other hand, the exchange rate of the lek against the euro has continued
strengthening in 2023. In annual terms, this strengthening registered an average value
of 8.5% in the second quarter and accelerated further in July, registering 12.1%.
Our analyses suggest that the strengthening of the exchange rate is in line with the
improvement in the balance of external economic and financial trade, illustrated by the
swift growth in tourism income, the continuous reduction of the current account deficit,
and by the high values of foreign direct investments. Also, this strengthening of the lek
is consistent with the enhanced public confidence in our national currency and the
reduced risk premia in the domestic financial markets.
In this light, consistent with the benefits of a free exchange rate regime, the
strengthening direction of the exchange rate has helped to reduce foreign inflationary
pressures and has enabled a slower normalisation of the monetary policy stance.
Nevertheless, the speed of the exchange rate strengthening remains high and
volatilities in foreign exchange market have been hiking.
The update of our projections suggest the continuation in the future of the trends noted
in the first half of year.
In our baseline scenario, the Bank of Albania expects economic growth to continue in
the next quarters and years. Economic growth pace is expected to record a slight
slowdown in the current year and in the next year, owing to a weaker economic activity
in the euro area and tighter financing conditions, in both Albanian and globally. Next,
economic growth is expected to return to its historical rates in the medium-term horizon.
On the other hand, based on the baseline scenario, inflation is expected to continue to
decline gradually in the next quarters and return to the target by the mid-next year. This
trajectory will be determined by the further decline of inflation in our trading partners
and by the better balancing of demand and supply in Albania.
At the same time, the updated analysis and forecasts suggest a more neutral balance
of risk profile compared to previous forecasts.
***
Judging on the above, the Supervisory Council decided to:
Keep the policy rate unchanged, at 3.00%;
Keep the overnight lending rate unchanged, at 4.00%;
Keep the overnight deposit rate unchanged, at 2.00%.
The Supervisory Council notes that this decision was based on the positive
performance of expected economic developments in the baseline scenario, by the more
neutral risk balance, as well as by the strengthening of the exchange rate and the
acceleration of the fiscal consolidation trend in the first half of the year.
However, the Supervisory Council deems that the elevated inflationary pressures from
the domestic economy remain a risk factor for price stability in Albania. In this view, it
highlights the willingness to continue the normalisation process of monetary policy
stance, if this measure will be considered necessary to guaranteeing price stability.
Last, the Supervisory Council points out that is scrupulously following the performance
of the exchange rate. The Supervisory Council considers that the strengthening of the
exchange rate has enabled the Albanian economy to have - simultaneously - one of the
lowest levels of inflation, interest rates, and financing cost, in turn one of the highest
economic growth rates across the region.
Nevertheless, the Supervisory Council emphasises that the Bank of Albania remains
attentive to the strengthening speed and increased volatilities in the exchange rate in
the last months. If expanding further, these phenomena may harm the smooth
functioning of foreign exchange market and - potentially - our objective of price stability
and financial stability. If these premises are concluded, the Bank of Albania has the
right to intervene in the domestic foreign exchange market, in fulfilment of its legal
mandate.