Dear ladies and gentlemen,

Today, October 6, 2021, the Supervisory Board of the Bank of Albania reviewed and approved the Interim Monetary Policy Report.

The new information analyzed in this report shows a rapid recovery in economic activity in Albania, coupled with pressures on rising inflation in Albania and around the world. On the one hand, the reduction in restrictions, improved household and business confidence and the positive effects of the economic recovery have led to widespread growth in demand for goods and services. On the other hand, temporary imbalances of supply and demand in international markets have caused additional shocks to inflation, beyond those dictated by the economic recovery.

The updated forecast confirms the projections for further growth in the Albanian economy over the medium term, which in turn will lay the groundwork for a stable convergence of inflation to be targeted in 2022.

Nevertheless, the materialization of these projections depends on the evolution of the pandemic, the stability of the global economic recovery and the impact of current shocks on the supply side. The increase in prices in world markets will affect the performance of inflation, in Albania and internationally. This impact should be temporary, but it constitutes a risk factor on the level of inflation and – potentially – on the speed of the economic rebound.

Judging the expected economic and monetary developments and the balance of risks surrounding them, the Supervisory Board considers it necessary to maintain the stance of accommodative monetary policy. The monetary stimulus has continued and will continue to serve to bring inflation back to the target stable and to support economic growth.

Then, I will present in more detail the reasons behind the decision making.

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New information in recent months has confirmed the trends expected by the Bank of Albania, although economic growth has been faster and inflation a little higher than expected.

Inflation stood at 2.2% and 2.4% in July and August, upward trend from the first half of 2021. This upturn in inflation mainly reflects the rise in food and oil prices. During this time, the prices of the other items in the basket have not changed significantly.

From a macroeconomic point of view, the rise in inflation reflected shocks linked to the external environment, due to the surge in prices on international markets. In recent months, the prices of raw materials, food and energy products have recovered rapidly. This increase reflected both the rebound in global demand coupled with the difficulties encountered in returning supply to pre-pandemic levels. Current projections show a normalization of the situation next year, suggesting that it will significantly affect final consumer prices, but temporarily. Nevertheless, central banks all over the world remain attentive to changes in the prices of energy products and raw materials.

On the other hand, inflationary pressures generated by the domestic economy appear to be on the rise, but still contained. This performance is triggered by an increase in employment and wages that is still insufficient for inflation to converge towards the target.

According to INSTAT data, the Albanian economy grew by 17.9% in the second quarter of 2021. This growth suggests that the Albanian economy has almost recovered from the losses of economic activity caused by the earthquake and the pandemic. Analysis of the available data shows that, growth in Q2 2021 reflects not only the strong base effect of the sharp economic decline in the second quarter of the previous year, but also the magnitude and strength of the factors fueling growth. in the first semester of the year. In addition, the analysis of the indirect data suggests rapid growth rates in the third quarter as well.

The recovery in economic activity has spread to a large extent. In terms of aggregate demand, it reflected the expansion of consumption and private investment, the increase in budgetary expenditure and the expansion of goods and services. In sectoral terms, it reflects the simultaneous expansion of construction, industry and service activities.

The improvement in economic activity has started to be reflected in the labor market, although its recovery remains partial. Employment increased 1.1% in the second quarter, while the unemployment rate fell to 11.6%. Despite the improving trends, employment continues to be lower and the unemployment rate higher than pre-pandemic levels. The return of the economy to full employment seems to need more time and continued support with macroeconomic stimuli.

Fiscal and monetary policy has provided adequate support for the economic recovery.

Fiscal stimuli remain in positive territory, but their intensity has been reduced in recent months. This performance is conditioned by the slowing down of the pace of public spending in the face of high rates of revenue collection. Next year, the Bank of Albania expects a return to the consolidation of fiscal policy stance. This would serve both in increasing the reaction space to potential shocks in the future, and in terms of proper sequencing of policy standardization.

The monetary stimulus has created a financial environment favorable to the growth of the economy and the return of inflation to target. Financial markets are functioning well, financing costs for the public and private sectors are low and the balance sheets of the banking sector are strong. In addition, the lek’s exchange rate has shown a slight appreciation during the summer months, in line with its seasonal behavior. The Bank of Albania believes that the financing conditions to support aggregate demand remain adequate and reflect a good transmission of our monetary stimulus.

Bank credit remains a stable source of financing for the economy, by reflecting favorable financing conditions, increased demand and the banks’ positive approach to lending. Credit to the private sector increased by 8.4% on average in July and August. Credit growth financed the expansion of investment by Albanian businesses and households and met their liquidity needs. In addition, loans continue to retain two positive characteristics: first, lek loans continue to show a high growth rate, indicating good transmission of monetary stimulus and strengthening of the resilience of the banking system to risks. Second, the bad debt ratio fell below the 7.0% level recorded in August, suggesting good quality in this portfolio.

Overall, the economic outlook remains positive. The Albanian economy is expected to grow faster in the current year and develop at a stable pace over the next few years. The favorable external environment, reduced uncertainty in Albania, simulated fiscal and monetary policy mix and improved private sector balance sheets will support economic growth. These factors are expected to stimulate increased consumption, exports and investment. Expanding demand will support increased employment, in turn, a further rise in wages and a gradual convergence of inflation towards a target by 2022.

The risks weighing on this forecast are balanced, although the performance of the economy remains subject to possible negative shocks from the pandemic, while the upside risks to inflation depend on price developments in world markets.

The potential downside risks stem from: (i) replacement of restrictions due to worsening epidemiological situations; (ii) a slower recovery in investment and consumption due to a more cautious approach by businesses and households; and (iii) a more rapid tightening of monetary conditions in the euro zone, driven by the latest rise in inflation.

The potential upside risks stem from: (i) faster growth in economic activity driven by more flexible fiscal consolidation; and (ii) more rapid or persistent price increases in world markets. In particular, the latter scenario has received increasing attention in recent weeks, reflecting the sharp surge in oil, natural gas and energy prices on world markets, and their impacts on tightening monetary policies. .

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In the light of these projections, the Supervisory Board of the Bank of Albania considered that the current stance of monetary policy remains adequate.

With this in mind, the Supervisory Board has decided to:

• Keep the key rate unchanged at 0.5%;

• Keep overnight demand and overnight loan rates unchanged at 0.1% and 0.9%, respectively.

Also, the Supervisory Board considers it necessary to maintain the current auctions of liquidity injection at a fixed price and unlimited quantity to the banking sector during the last quarter of 2021.

The Supervisory Board considered that the fulfillment of the expectations of the reference scenario – which provides for the adoption of a consolidated fiscal policy orientation, the continued rebound of the economy and the temporary effects on inflation of a shock supply – would require the gradual normalization of monetary policy over the next few quarters. This standardization would serve both: our mandate to maintain price stability; and sustainable economic growth in the medium and long term.

In addition, the Supervisory Board will continue to monitor the consequences resulting from the increase in prices on the world market. Should this surge prove to be stronger and more persistent over time, and if this impact on domestic inflation is greater than current expectations, the Supervisory Board remains ready to review the stance of monetary policy; being mindful of the latter is always in line with our inflation target.