Governor Sejko: Statement to the Press Conference on Monetary Policy Decision, 7 August 2024

Dear Ladies and Gentlemen,

Today, on 7 August 2024, the Supervisory Council of the Bank of Albania reviewed and approved the Monetary Policy Report for the third quarter.

The economic and monetary developments, over the first half of year, have resulted in line with our expectations. The economic volume, employment and wages have been picking up, while inflation declined considerably. This performance suggests the Albanian economy is overcoming the shocks we experienced from the upsurge in prices in international markets in 2022 and 2023.

The Supervisory Council deems that the monetary policy implemented by the Bank of Albania has provided an important contribution to this performance. The prudential normalisation of monetary policy stance succeeded in putting inflation under control, without jeopardising the positive development trend of Albania and its financial stability.

The update of our forecasts shows that the development will proceed on this positive trend in the future as well. In particular, the Albanian economy is expected to continue growing in the medium term, at stable rates and close to potential, while inflation is expected to stay close to current rates for the rest of 2024, and return to the target in the first half of next year.

Against this backdrop, the Supervisory Council assesses that the current monetary policy stance remains adequate.

[Below, I will outline today's decision and explain in more detail the rationale behind it.]

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Inflation of consumer prices declined over the second quarter, standing close to 2.1% average. This performance was almost underpinned by the fall of inflation in food items, particularly of fruits and vegetables, while inflation in other basket items was overall stable, though slightly trending downwards.

From the macroeconomic perspective, the fall in inflation, in the second quarter, has reflected the fast reduction in imported inflation, while domestic inflationary pressures appear more stable.Imported inflation inched down as the exchange rate strengthened while inflation declined in our trading partners. In particular, inflation in food items slowed down rapidly in Albania in parallel with a similar performance across international markets, suggesting a reflection of a positive supply-side shock. On the other part, the solid demand for goods and services coupled with the relatively fast growth in wages and production costs underpinned the build-up of domestic inflationary pressures.

According to INSTAT data, the Albanian economy grew by 3.6% in first quarter of 2024. The economic activity expanded, reflecting the rise in family consumption and private sector investments, as well as the increase in the export of services. On the other hand, the export in goods declined, and the fiscal policy continued the consolidation trend. This profile of the demand drove to the expanded activity in the sectors of construction and services, while the activity in the sectors of industry and agriculture went down. Data of the second quarter suggests a similar performance with the one in the first quarter.

Our analyses suggest the Albanian economy has embarked on a positive business cycle. This performance is reflected in the high utilisation of businesses' capacities and the shortages noted in the labour market.

In particular, the expanded demand for goods and services has been accompanied by the continuous growth in employment and the rise of wages in the private sector. Although official data for labour market is still unavailable, indirect data suggests the positive trends recorded in the labour market over the past year have also persisted in the first half of the current year. The rise in wages in the private sector generates higher income for Albanian households, though it continues to exert pressure on production costs and consumer prices.

From macroeconomic prospect, the sound balance sheets of the private sector, the consumer and business confidence for the future, the simulating financial environment, and the trend of income from tourism ticking up, underpinned the expanded activity.

In this context, the prudential monetary policy we have implemented over the past two years, has resulted successful. The normalisation of monetary policy stance has enabled a better demand and supply balance in the economy, and has maintained inflationary pressures under control. Also, the attention we have paid regarding the monetary policy reaction, has helped in maintaining an accommodative financial environment.

As a result, financial markets continue to be calm. They are characterised by ample liquidity, low risk premia and a good credit supply, in both aspects: credit costs and banks' approach towards lending. Also, the exchange rate has been relatively stable in the recent months, reflecting - among others - a high purchasing level of foreign currency in the market from the Bank of Albania.

Credit to the private sector continued to perform positively in the second quarter. Credit growth pace has been edging up, reaching at 14.6% in June. The expansion of credit continues to be supported - at the largest extent - by the fast growth in lek-denominated loan portfolio, in reflection of the low interest rates. Also, credit expansion continued to be broadly-based, meeting the needs of enterprises and households, for investments, consumption and working capital. In addition, credit portfolio continues to have a good quality, as shown by the low rates of non-performing loans.

Our forecasts for the outlook remain positive. Economic activity in Albania is expected to continue growing in the medium-term horizon, bolstered by the further expansion in both domestic demand and foreign demand. In parallel, employment and wages are expected to tick up, in turn boosting the welfare of households. On the other hand, inflation is expected to fluctuate on the downside of our target for the rest of year and gradually return to the target in the first part of next year.

Based on the available inflation, the Supervisory Council of the Bank of Albania deemed the balance of risks to these projection is overall neutral.

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Taking into account these circumstances, the Supervisory Council decided to:

• Keep the policy rate unchanged, at 3.0%;
• Keep the interest rate on overnight deposit unchanged, at 2.0%;
• Keep the interest rate on overnight lending facility unchanged, at 4.0%.

The Supervisory Council judges that the current monetary policy stance is adequate for meeting our price stability objective in the future.

The Supervisory Council notes that the overall balance of medium-term pressures is gradually converging to our inflation target. In this context, the next monetary policy decisions will continue to be depended on new information, and particularly on the analyses and assessments about the performance of the domestic inflationary pressures. These decisions will always be congruent with our price stability objective, consistent with the fiscal policy stance and the performance of the exchange rate.

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Concluding, concerning the recent discussions on the situation created in a particular segment of the financial system, that of addressing non-performing loans, the Supervisory Council emphasizes the following.

The Bank of Albania is a constitutional institution mandated by the law with a core mission for the sustainable development of the country: safeguarding price stability and supporting financial stability. The entire policy-making, regulatory and supervisory activity of the institution has been and remains exclusively oriented towards fulfilling this mission.

The Supervisory Council, as the highest decision-making and supervisory body of the Bank of Albania, has exercised its duty with responsibility and in a professional manner.

The Council has always taken decisions in the interest of the public good of the country and the society; it has carefully monitored in accordance with the legal mandate, the implementation of the tasks charged, and has been regularly informed on the reports of the organizational units of the Bank of Albania, including those of banking supervision.

Overall, the Supervisory Council assesses that the activity of the Bank of Albania has been in line with the legal and regulatory framework and has served the accomplishment of its mission in line with the needs of economic development of Albania.

The Bank of Albania and the Supervisory Council are ready for supporting all the necessary legal reforms to consider the issues that have arisen from developments taking place in the market that addresses non-performing loans, as well as to undertake with priority any necessary regulatory initiatives that fall within its mandate and competence.

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