Growth of the M2 monetary aggregate last year marked the lowest level since 2018. 

M2 gives value to money outside banks and residents' bank deposits in lek (excluding government deposits) and therefore represents the value of the money supply in local currency. 

Bank of Albania data show that at the end of December 2022, the growth of the monetary aggregate M2 on an annual basis was at the level of 2.3%, from 6.5% that had been a year ago and 13.8% that had been at the end of 2020 Such a low increase in money supply in kek has not been recorded since the end of 2018. 

Braking of the M2 aggregate is marked in all its constituent components. The growth of current accounts and demand deposits in lek was reduced to 3.9%, from 14.5% a year ago. Meanwhile, the decline in time deposits in local currency deepened further to 6.3%, from 3.5% a year ago. The indicator of money outside banks recorded a growth of 5.8%, lower than the growth of 6.3% that was recorded in the same period of the previous year. 

Decline of the monetary aggregate M2 appears to be the result of a monetary policy that has taken on tighter features since March of last year. The basic interest rate increased gradually, from the historical minimum of 0.5% to 2.75% at the end of November, while on March 23 of this year the Bank of Albania undertook the next increase to 3%. The normalization of monetary policy is gradually being reflected in a smaller increase in the injection of money into the economy, in an effort to mitigate strong inflationary pressures. 

Fiscal policies may also have had an impact on the significant slowdown in aggregate M2 growth. The budget deficit last year decreased by more than 8% compared to the previous year, which means that the fiscal stimulus was lower compared to the previous year. The slowed growth of aggregate M2 is also a factor that may have partially influenced the strengthening of the lek in the foreign exchange rate. 

According to data from the Bank of Albania, the average exchange rate of the euro for 2022 decreased to 119 ALL, 122.5 ALL that had been in 2021. But, the second half of the year brought an apparent tendency towards a higher appreciation of local currency. For the last quarter of 2022, the Euro was exchanged at an average of 116.4 ALL, while for the month of December the average exchange rate was even lower, at the level of 114.9 ALL. 

(Source: Monitor)