Bank of Albania: Inflation risks are increasing

The quarterly monetary policy report for the fourth quarter of the year states that uncertainties about the future have increased and risks to inflation have increased.

The Bank of Albania estimates that, as in the partner economies, the return of inflation to the target is expected to be a gradual process, in conditions where internal pressures on prices, especially from the labor market, appear stable.

Inflation in Albania decreased to an average level of 4.1% in the third quarter, from the respective levels of 6.5% and 4.6% in the first and second quarters of the year. The downward trend in inflation has been influenced by lower oil prices and lower food inflation, reflecting the decline in these prices in global markets and exchange rate appreciation. But, on the other hand, core inflation and, in particular, service inflation continue to remain at high levels, giving a stable contribution to inflation and restraining its further reduction.

New economic information shows that demand in the economy is growing faster than the economy's ability to service it. Thus, economic growth accelerated to 3.2% in the second quarter and indirect data suggest faster growth in the remaining half of the year.

Economic growth has been fueled by increased consumption, investment and export of services, as well as supported by the good financial health of the private sector, its high levels of confidence and the rapid growth of tourism. At the same time, it has generated a high demand for employment, a demand which is having difficulty being met by the labor market.

Conditions in this market continue to be tight, reflected in historically low levels of the unemployment rate, historically high levels of labor shortages, and rapid wage growth. The latter accelerated the growth rate to 16.9% at the economy level and 15% in the private sector, in the second quarter. Wage growth provides support for household incomes, but it increases production costs and keeps domestic inflationary pressures high.

Even at the global level, uncertainties about the future have increased, in the presence of new geopolitical tensions, the persistence of inflation and the tightening of financing conditions.

"Under these circumstances, the Bank of Albania considers that establishing a more balanced ratio between demand and supply is necessary to enable inflation to return to the target. High inflation is harmful to households and businesses because it erodes the purchasing power of income, devalues ??savings, makes future planning difficult and risks being associated with an ineffective allocation of the economy's productive and financial resources.

In this environment, future monetary policy decisions will continue to be guided by new data and the achievement of our price stability objective," the monetary policy report said.

The forecasts of the Bank of Albania indicate that inflation will decrease during the following quarters, returning to the target of 3%, starting from the second half of 2024. This forecast factors in the reduction of inflationary pressures from abroad, as well as the normalization of the stance of the monetary policy. This normalization, which means a gradual reduction of the monetary stimulus in the economy and the return of the monetary policy to a more neutral position, aims to create a suitable financial environment for maintaining the country's monetary and financial stability. monitor