Albania raises interest rates as inflation threatens growth
The Central Bank of Albania raised interest rates from 0.25 to 1.25%, “signaling the bank’s determination to preserve price stability”, and noting that the initial rise in inflation caused by supply problems with a limited number of basic products, such as oil and foodstuffs, became wider.
Bank Governor Gent Sejko warned the country that a current inflation rate of 6.7% may not have peaked, adding that while the country is expected to avoid a recession, growth will probably drop.
“Our base case suggests that the inflation rate will peak not far above the current level during the third quarter of this year,” Sejko said.
Like most Western countries, Albania faces price inflation due to the sharp increase in the prices of imported goods such as oil and foodstuffs. This raised the specter of “stagflation”, last seen in the 1980s, that is, when economic growth stagnates while inflation remains high.
“Inflation is the biggest danger threatening the country’s long-term sustainable growth,” Sejko said.
Albania’s economy recorded strong growth in the first quarter of 2022 after recovering from the pandemic-induced recession in 2020. However, fuel imports have declined since then, due to the sharp increase in prices, suggesting the economy is slowing down.
Albania is a net importer of processed fuels, foodstuffs and electricity, while its exports mainly focus on crude oil, minerals and clothing. Its current account is largely in deficit.
Despite these problems, Albania’s currency, the lek, is strong and its price is currently at its best in decades at 118 leks to the euro. Last year’s average was around 125.
Some suggest that the money laundering activities of organized criminal groups who invest their money in tourism and construction are the reason why the currency has strengthened despite the large current account deficit.