TIRANA, Nov. 2, 2023 – Albania’s central bank supervisory council has announced another hike in Bank of Albania’s key interest rate, up by 0.25 percentage points, bringing it to a rate of 3.25 percent.
Inflation has seen a declining trend in 2023, but it is still higher than what the central bank would like to see.
Official data reported an average of 4.1 percent inflation during the third quarter, primarily driven by falling imported inflation as Albania’s currency has also seen a strengthening against key international currencies.
Nevertheless, the BoA has emphasized that “high inflationary pressures from the domestic economy continue to pose a risk to price stability within the country, and the inflation risk balance has shifted upward.”
BoA Governor Gent Sejko said the reduction of monetary stimulus through further normalization of monetary policy is a necessary measure to ensure the return of inflation to the target within the next year.
“It factors in the need for a more active role of monetary policy in balancing supply and demand for goods and services, amidst expectations for a more stable exchange rate and a more neutral fiscal policy in the medium term,” Governor Sejko said. “In this context, it serves the purpose of preserving the purchasing power of Albanian households, ensuring the monetary and financial stability of the economy, and the sustainable, long-term development of the country.”
The increase in the base interest rate was also recommended by the International Monetary Fund (IMF) mission at the conclusion of last week’s meetings in Albania.
“Returning inflation to the targeted objective is likely to require several further increases. With rising domestic inflationary pressures, in conditions of labor market tightness and still-negative real interest rates, there is room for further increases in the base rate. A gradual rise in the base rate toward a neutral position – estimated at around 4.5 percent – would help return inflation to the targeted objective at the beginning of 2025,” the IMF representatives noted in the report.
The IMF further explained that there is “uncertainty about the inflation outlook,” and therefore, “a flexible approach allowing decision-making on the base rate meeting after meeting would be appropriate.”
After a long 13-year period during which the base interest rate in Albania had only seen lowering, falling to a historic low of 0.5 percent, the Bank of Albania intervened for the first time in March 2022 to increase rates when inflation began showing initial signs of growth. Throughout the past year, the bank intervened with consecutive hikes four times and most recently in March of this year.
