bne IntelliNews – Albanian Central Bank Raises Policy Rate to 2.25%
The supervisory board of the Bank of Albania decided on October 5 to increase the key rate by 0.5 percentage point (pp) to 2.25%.
The decision was taken on the basis of rising inflation in Albania. While the annual consumer price inflation rate – at 8.0% in August – is lower than most countries in the region, it has risen sharply since mid-2021.
The central bank also raised the overnight deposit rate and overnight lending rate by 0.5pp each to 1.25% and 3.25% respectively.
The bank’s interim monetary policy report concluded that supply-side shocks and heightened uncertainty in international markets are “translating into high inflation and slow economic growth in Albania”, the governor said. of the central bank Gent Sejko.
“In particular, foreign inflationary pressures, compared to our previous assessments, have been stronger and more stable. Furthermore, these pressures are spreading to the whole economy due to the soaring demand for goods and services, the dynamic labor market coupled with expectations of high inflation rates in Albania,” said Sejko continued, quoted in a statement from the central bank.
The bank’s supervisory board “has therefore considered that the rapid rise in prices remains the main risk jeopardizing both monetary and financial stability, as well as the sustained and long-term economic growth of Albania”.
While the main drivers of inflation in Albania are rising oil and food prices, Sejko noted that price increases are spreading to a growing range of goods and services.
“The war in Ukraine has aggravated global supply bottlenecks and created new headwinds, mainly in food, energy and commodity markets,” the central bank governor commented. .
“As a result, the prices of these products have rapidly increased in the global and Albanian markets. At the same time, the strengthening of aggregate demand in Albania has supported the increase in employment and wages, while accentuating domestic inflationary pressures” .
Although Albania’s economy continued to grow in the second quarter of 2022, growth slowed to just 2.2% from 6.5% in the first quarter of the year. Sejko noted a rapid deceleration in activity in the construction and industrial sectors, with signs of a slowdown in other sectors as well.
At the same time, growing demand for goods and services put pressure on the Albanian labor market, with the unemployment rate falling to an all-time low of 11.1% in the second quarter. This added to inflationary pressures by driving up wages in the private sector.
“This performance supports Albanian household income in the following period, although it is a premise for inflationary pressures to remain longer,” Sejko commented.
The central bank currently expects inflation to return to target in the first half of 2024. It is expected to remain elevated over the next two quarters, after which it will start to decline.
According to the Bank of Albania, the balance of inflation risks is up while the balance of growth risks is down. The war in Ukraine is the main source of uncertainty. “[The] the escalation of the conflict may lead to higher commodity prices, disruption of supply chains and lower, even negative, economic growth in the region and in Europe,” Sejko concluded.