The Bank of Albania has increased interest rates for the first time in 10 years, according to an announcement on Wednesday.
The first change since the start of the COVID-19 pandemic, and the first increase since 2011, the interest rate of the lek will now increase to 1% from 0.5%. Central Bank Govenor Gent Sejko said the increase is to keep inflation limited, which according to forecasts could reach 6% by the end of the year.
“Supply shocks and domestic demand stability are expected to be reflected in higher inflation rates. According to the baseline scenario, inflation will fluctuate around the level of 5-6% for the rest of 2022. Further, with the expected calming of international markets, inflation is expected to decline during 2023 and return to target in its last quarter,” said Sejko.
The change in interest rate will likely be passed on to any loans, debt securities, or deposits made in lek.
Central Bank interest rates are typically slashed during times of recession in an aim to encourage businesses and consumers to be active, therefore boosting the economy. But when the economy grows, rates are increased to slow price increases in the hopes of preventing excessive borrowing.
Sejko said, “the Albanian economy has shown clear signs of recovery,” but rising prices in world markets and reducing foreign demand will be accompanied by higher inflation rates and slower economic growth.”
He added that data from foreign markets suggests that prices internationally will remain high during 2022 and 2024, eroding household purchasing power and slowing economic growth.
