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BoA keeps key rate at 2.5%, Sejko: Economy will continue solid growth

2025-11-05 20:05:00, Ekonomi CNA

The Bank of Albania decided at today's meeting to keep the key interest rate unchanged, at 2.5%.

In his speech after the Supervisory Council meeting, Governor Gent Sejko said that the Albanian economy has continued to grow, while the main parameters of the country's economic, monetary and financial stability remain consolidated.

The Bank of Albania estimates that the expansion of economic activity was supported by the growth of household consumption, private sector investment and service exports. On the other hand, fiscal policy has continued to show a consolidation nature, while exports of goods have declined.

This demand profile has driven the expansion of the services and construction sectors, while the agriculture and industry sectors have continued to contract. Indirect information available, according to him, suggests similar growth rates and structure during the second half.

The increase in demand for goods and services is also reflected in the labor market. Employment in the non-agricultural private sector increased by 3.4% in the second quarter, the average wage increased by 9.5%, while the unemployment rate remains at a historically low level of 8.5%.

"The rapid increase in wages has not been fully reflected in price increases, as a result of its absorption by productivity and business profit margins. However, high demand for labor from businesses and a lack of supply continue to keep the labor market under tension."

"From a macroeconomic perspective, economic growth has been supported by sound private sector balance sheets, confidence in the future of families and businesses, expanding tourism revenues, and favorable financing conditions," said Sejko.

Inflation has marked a slight increase during the third quarter, but it continues to remain at low levels and below the Central Bank's target.

According to the Governor, the increase in inflation this quarter was dictated by the relatively rapid increase in rental prices, the slight increase in services inflation, and the stabilization of oil prices. On the other hand, food price inflation decreased, while inflation of other basket items appeared relatively stable.

From a macroeconomic perspective, the upward trend in inflation during the third quarter reflected the increase in core and domestic inflation, versus the decline in non-core and imported inflation.

Thus, core inflation increased to 2.9% in the third quarter, an increase almost entirely driven by the increase in rental prices. On the other hand, non-core inflation decreased to 1.2%, reflecting the significant reduction in food inflation.

“In the longer term, the low and below-target inflation rate reflects the dampening effect that the exchange rate appreciation has had on imported inflation and supply shocks, which have kept food inflation low.

On the other hand, domestic inflationary pressures remain in line with our inflation target, as a result of the stable performance of labor and production costs, profit margins and inflation expectations," said Sejko.

According to him, the prudent monetary policy of the Bank of Albania has played an essential role in controlling inflation, enabling the overall reduction of risk premiums in financial markets and contributing to the improvement of financing conditions.

In particular, the easing of the monetary policy stance in July has brought about a further reduction in interest rates on new loans and reduced the servicing costs of existing ones.

Likewise, the increased presence of the Bank of Albania in the domestic foreign exchange market has helped reduce upward pressures on the exchange rate, enabling a more stable level.

As a result, financial markets continue to be characterized by ample liquidity, low interest rates, sound banking sector balance sheets, and a positive approach to lending.

Credit to the private sector continued to grow at double-digit rates during the third quarter. The loan portfolio grew by 14%, marking a slight slowdown compared to the first half of the year, but providing sufficient coverage of the funding needs of businesses and households.

The growth of the loan portfolio continues to remain high and stable in the Lek loan segment, business investment loan and individual loan segments, but it has shown signs of slowing down in the foreign currency loan and working capital loan segments.

On the other hand, the quality of the loan portfolio, assessed through the non-performing loans indicator, continues to remain satisfactory.

In its projections for the future, the Bank of Albania assesses that the update of the baseline scenario forecasts suggests that the outlook for economic developments remains positive.

"Economic activity in the country is expected to continue to grow in the medium term, at solid rates and close to potential. Economic growth will be driven by further expansion of consumption, investment and tourism exports, and will enable further growth in employment and wages."

"Inflation is projected to return to our 3% target during the first half of 2026. This forecast reflects our expectations for balanced demand and supply for goods and services, for stabilization of inflation in international markets, for a more stable exchange rate performance, and for the absence of supply shocks in the future," the Governor said.

However, he stressed once again that the risk landscape for the future remains complex. Although easing, trade and geopolitical tensions pose material downside risks. On the other hand, labor market shortages and rapid wage growth could translate into higher inflation than the Bank of Albania's forecasts./ Monitor