The Supervisory Council of the Bank of Albania decided on Wednesday to keep the basic interest rate unchanged at 3.25%.

In his speech, Governor Gent Sejko said that consumer price inflation marked a significant and faster decline than the expectations of the Bank of Albania during the first three months of the year. According to him, the downward trend of inflation in the country continues to be determined by the drop in inflation in our trading partners, by the strengthening of the exchange rate, as well as by the normalization of the stance of monetary policy.

However, he underlined that the rapid decline in inflation in the first quarter seems to reflect another foreign supply shock, this time with a downward impact on food prices.

"The increase in the supply of food items has brought about a rapid decrease in their inflation in all the countries of the region. However, the effect in Albania was more significant, due to the high weight that food items have in the consumption basket. Our analyses suggest that food prices in the country will continue to be subject to this shock for several months, but its effect is expected to remain transitory anyway. On the other hand, internal inflationary pressures, although decreasing, remain relatively high. These pressures are fueled by solid demand for goods and services, a demand which is reflected in the rapid growth of employment, wages, and production costs of the private sector," said Sejko.

According to INSTAT data, the volume of economic activity increased by 3.4% during the past year, marking an improvement to 3.8% growth rates in its second half.

According to the Governor, the available data suggest that economic growth has remained at approximate levels during the first quarter of 2024. The economic growth of the last quarters has been dictated by the expansion of private sector consumption and investments, as well as by the expansion of exports of services. In particular, the contribution of tourism to the expansion of economic activity has grown progressively during the year. On the other hand, the export of goods has decreased and the fiscal policy has had a consolidating nature, despite the concentration of expenses in the last quarter. This demand structure is reflected in the increase in activity in the services and construction sector, while the industry and agriculture sectors have recorded a contraction.

According to the Bank of Albania, the expansion of aggregate demand continues to be fueled by the healthy balances of the private sector, the improvement of business and household confidence, the still stimulating monetary and financial conditions, as well as by the increase in foreign demand for Albanian services. These factors are expected to support the expansion of demand and economic growth during the following period as well.

In its forecasts, the Bank of Albania estimates that in the basic scenario, economic activity will continue to grow, both in the short-term and in the medium-term horizon, supported by the gradual improvement of the foreign environment, solid balances of the private sector, and accommodative monetary conditions.

"Inflation is expected to hover around current levels in the short-term horizon and gradually return to target within a year's time frame. The balance of risks to the inflation forecast is on the downside for the short-term horizon and neutral for the medium-term one," Sejko said.