At this time, galloping inflation, the Bank of Albania (BoA) seems to have an effect on curbing it by raising the key interest rate.<\/p>\n
With the increase of 0.5 percentage points of the key interest rate, from the level of 0.5% to the level of 1.0%, as well as with the maintenance of the overnight deposit interest rate, at the current level of 0.1%, but changing the increase of the loan interest rate overnight, from 0.9% to 1.9%, the Bank of Albania continues to be more than measured about the impact of the financial system on the growth of the economy, employment and wages.<\/p>\n
It is known from the theory that inflation and interest rates tend to move in the same direction, because interest rates are the main tool used by every central bank to manage inflation.<\/p>\n
For many, many years, the Bank of Albania has targeted annual inflation below 3% in line with the stable price weight of its dual mandate.<\/p>\n
When the Central Bank has already responded to rising inflation risks by raising its standard rate, it is effectively increasing the level of reserves in the financial system, limiting the money supply available for purchases of the riskiest assets.<\/p>\n
What does this mean for individuals \/ businesses taking out long-term loans?<\/p>\n
For example, if you borrow 10,000 Lek\u00eb at a 1% interest rate, you will pay 10,100 Lek\u00eb to the lender from whom you borrowed. The lender will have a profit of 100 ALL. But each loan has its own interest rate that will determine the actual amount you owe.<\/p>\n
The same effect happens to the lending of the country’s economy and of course that this moment of monetary policy is not the one that applies to the development of investments and consequently the economy.<\/p>\n
By increasing borrowing costs, rising interest rates discourage consumer and business spending, especially on large bank-financed purchases, such as housing, cars, and capital equipment. Rising interest rates therefore tend to weigh on asset prices, restoring the effect of wealth on households and making banks more prudent in lending decisions.<\/p>\n
As the moment of decision-making for raising interest rates shows, it seems that the response of monetary policy to market changes in the economic perspective is a little late as this necessary measure will take time to influence inflation trends. Meanwhile, inflation and its upward trend began to affect the Albanian market after the summer of 2021.<\/p>\n
Although bond auctions have been present as one of the most active traditional open market instruments, this has mostly helped the Bank of Albania to regulate the supply supply of the banking system reserves and to keep the rate at target.<\/p>\n
Due to this delay, which has an impact to be analyzed in depth by analysts of the financial system and monetary policy, given the increased risks in the financial market and the global economy with which the Albanian market interacts, as well as based on the restraining impact of reforms unadulterated by the politics of the day, it remains the task of responsibly analyzing and anticipating measures for future inflation trends much sooner than the time when the consumer himself realizes.<\/p>\n
It is worthwhile for citizens to be informed and communicate with banks about the contractual effects that result from the increase in the cost of borrowing, as with higher interest rates, interest payments on loans are more expensive.<\/p>\n
Higher interest rates can increase the value of the Lek. However, a stronger Lek makes Albanian exports less competitive, affecting exports and in favor of increasing imports.<\/p>\n
This moment, when the government itself has taken on debt will have another major problem regarding the cost of paying interest on the debt. Albania’s budget will currently pay in 2022 over 415 million Euros (50.7 billion ALL) for its national debt. Higher interest rates increase the cost of government interest payments. This can lead to the forced need for much more tax income.<\/p>\n
At the moment the main goal of monetary and fiscal policy should be to encourage businesses and individuals to spend money to move the economy.<\/p>\n
This reaction of the Bank of Albania, recently consulted with foreign and domestic experts, is in a well-known format, where by increasing the key interest rates, this will affect the increase of loans, hoping to reduce the demand for goods and services in the whole economy. Prices may not necessarily go down, but their inflation rate will usually go down.<\/p>\n
In reality, not all those who really need cash lending can be affected by this whole mechanism. The increase in interest rates in this situation when the economy needs lending and will have it again, should already be harmonized with an increased money supply for groups of individuals and businesses that really need this lending. Otherwise, an integrated monetary and fiscal policy should be considered to help our economy, which is likely to experience declining consumption and investment.<\/p>\n
There may be a real need to support direct money supply for those segments that are not part of the impact of these policies (retirees, the poor, farmers, competing export products, tourism activities and possibly others linked with them).<\/p>\n
Although the Bank of Albania since 2015 has adopted the regime of “inflation targeting” as a monetary policy framework, where with this approach it has removed the increase in money supply as indicators of inflationary pressures, most likely the current policy should be analyzed to make a more realistic adaptation to post-pandemic trends and to a meat-and-meat mismatch of supply and demand mismatch in the global economy.<\/p>\n
This monetary policy with rising interest rates has had little impact in the recent past of the Albanian market (early 2000s), where interest rates on lending were relatively high. If you look at the consumption and the performance of the economy, you can see that the element of informality, weak fiscal culture, evasion and corruption strongly influenced, devaluing many of the effects that monetary policy could affect at that time.<\/p>\n
So, in accordance with our explanation, e.g., when the price of crude oil is rising sharply these days mainly due to new aggression-related blockages in Ukraine, then dealers of car fuels will have to pass these higher prices to consumers in the form of higher retail prices, regardless of interest rates.<\/p>\n
In this case, the Bank of Albania, before being forced to dramatically increase interest rates and significantly reduce the demand to slow down the inflation rate, should seek a supportive policy from the Ministry of Finance and Economy to analyze the consequences that follow by the decision of the BoA.<\/p>\n
At this point in time, no one knows what percentage should be needed to raise interest rates to reduce inflation to around 2-3%.<\/p>\n
But Albanian finance can do its job by not allowing market speculation by increasing informal lending and increasing evasion tendencies.<\/p>\n
This is called forced coordination and harmonization between monetary and fiscal policy.<\/p>\n","protected":false},"excerpt":{"rendered":"
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