Albanian central bank raises base rate to 2.75%

Albanian central bank raises base rate to 2.75%
/ bne IntelliNews
By bne IntelliNews November 2, 2022

The Bank of Albania raised the base rate by 0.5 of a percentage point (pp) to 2.75% on November 2. 

The Albanian central bank said that high inflationary pressures remain the main risk to sustainable and long-term growth in the country. Inflation reached 7.9% during the third quarter of 2022. 

With the aim of securing price stability, the central bank also raised the one-day loan interest rate, the one-day deposit interest rate and the one-day deposit interest rate by 0.5 pp each to 3.75% and 1.75% respectively. 

A statement from the central bank said that the gradual normalisation of monetary policy is necessary to rein in inflation, and the normalising cycle will continue.

The central bank said that inflationary pressures are increasing and their base appears to be expanding. 

The overall increase in inflation reflected primarily higher food, oil and transport costs, which together accounted for around 80% of total inflation in the third quarter. However, the price increases are now appearing across most of the consumer basket. 

"From the macroeconomic point of view, the increase in inflation reflects to the greatest extent the strong pressures coming from the foreign environment, but also a growing contribution from the domestic environment,” said central bank Governor Gent Sejko. 

“The increase in internal inflationary pressures reflects the action of three factors. First, the good cyclical position of the Albanian economy, a position which originates from the stable demand for goods and services and implies a high utilisation of domestic production capacities, has been accompanied by a rapid increase in wages. Second, the high prices of raw materials, oil and energy, lead to a further increase in domestic production costs. Third, the increase in expected inflation affects the increase in the prices of futures contracts.”

Albania’s economy continued to grow despite the shocks stemming from Russia’s invasion of Ukraine. According to statistics office Instat, the economy grew by 2.2% in the second quarter, and cross-sectional data suggest that growth continued in the third quarter. 

However, Sejko noted that growth has slowed since the first quarter of the year, which “reflects the negative effects stemming from high levels of inflation, both domestically and globally”. 

The Bank of Albania expects that over the next two years the Albanian economy will continue to grow and inflationary pressures will decrease.

Inflation is predicted to remain high in the fourth quarter of the current year, but to be progressively reduced during 2023 and to return to the target in the second quarter of 2024, the statement said. 

However, the Bank of Albania warned of heightened uncertainty ahead, with risks tilted to the upside for inflation.