Bank of Albania lowers key interest rate to 3% for the first time since February 2022

On July 3rd, the Bank of Albania eased its monetary policy by reducing the key interest rate to 3% for the first time since February 2022. This decision was made by the Supervisory Council, lowering the base interest rate by 0.25 percentage points from the recent peak rates of 3.25%. The reduction also affects the overnight deposit and lending rates, which were adjusted to 2% and 4%, respectively.

Why is this relevant

This move is significant as it marks a shift in the monetary policy stance from tightening to easing, a response to the positive economic developments and declining inflation in the country. By lowering the interest rates, the Bank of Albania aims to stimulate economic activity by making borrowing cheaper, thereby encouraging investment and consumption. This move is crucial for maintaining economic momentum, as well as ensuring that inflation remains within target levels.

Bank of Albania Governor Gent Sejko explained that the primary reasons for this decision were the positive economic performance and the decrease in inflation. Data indicates that the Albanian economy continues to develop positively, with economic activity, employment, and wages increasing over the first two quarters of the year. Inflation has been on a downward trend, and the financial sector has remained relatively calm, with a progressive increase in lending.

The rapid decline in inflation during the second quarter was mainly driven by the increased supply of food products in both regional and domestic markets. This trend is expected to continue throughout the year. The updated forecasts suggest that the positive momentum in the Albanian economy will persist, with economic activity expected to grow in 2024 and inflation to remain around current levels before gradually adjusting towards the target in the first half of 2025.

The reduction in the key interest rate aims to create favorable monetary conditions to achieve the Bank’s price stability objective. The governor emphasized that the easing of monetary policy was necessary to support domestic demand and economic growth. The move also aligns with similar policy adjustments by the European Central Bank, preventing undesirable consequences for the exchange rate.

The domestic financial sector has shown resilience, with a healthy expansion in credit, particularly in the local currency. Economic growth has been driven by increased consumption, private investments, and a booming tourism sector, despite a decline in goods exports. So far, the Central Bank’s gradual and cautious approach to normalizing monetary policy since 2022 has effectively reduced inflationary pressures without harming medium-term growth prospects.