Albania’s central bank said on June 6 it decided to intervene in the financial market with the purchase of euros as appreciation of the local currency, the lek, against the European currency picked up pace.

The Albanian lek had been stable for several years now at around ALL140 to the euro, but it started to strengthen against the euro in 2016 and posted record high levels this year, particularly in May. On June 6, the exchange rate was around ALL124 to the euro.

"The analysis showed that the exchange rate in May showed a faster and further appreciation of the lek against the euro, which exceeded the appreciation trend noted in the two previous years," the central bank said in a statement.

This development forced the central bank authorities to purchase foreign-currency in aim to eliminate the temporary excess of euros in the market and decelerate the further appreciation of the exchange rate, which was expected to hamper the price stability.

“Foreign currency purchase operations will be carried out for an adequate period, as necessary to achieve the relevant goals,” the central bank said.

However, the supervisory council of the central bank said that the exchange rate will continue to be a floating one, determined by demand and supply in the foreign currency market.

Albania has maintained a free-floating currency regime since 1992, unlike some other countries in the region which opted for fixed exchange rates with the euro.

As the central bank decided to ease its monetary policy stance it also cut the key interest rate by 0.25 pp to 1%. The rate has been at the same record low level since May 2016.

The central bank's supervisory council also decided to lower the rates for the overnight deposit facility by 0.15 pp to 0.1% and for overnight lending facility by 0.35 pp to 1.9%.

Economy expert Arben Malaj was cited recently by the Tirana Times as saying that the depreciation of the against the lek is mostly negatively affecting the country’s exporters, and requires intervention through a series of incentives to preserve the competitiveness of Albania’s exports.

There is also media speculation that the lek appreciation was connected with huge revenues from drug smuggling. 

However, the central bank explained that the reasons for the appreciation are mainly linked to capital conversion of some banks, disbursement of a loan in foreign currency to an unnamed public company and expectations of a good tourism season.

"As a result, such expectations have led to both an increase in supply and a decrease in demand for foreign currency," the central bank said.