TIRANA, Feb. 4 – Albania’s central bank has decided to preserve its mid-term 3 percent annual inflation target as a measure under which the monetary policy will continue having a positive contribution to the development of the Albanian economy, according to a recent decision by the Bank of Albania Supervisory Council.
An inflation target level of 3 percent reflects the development stage of the Albanian economy as a small, open and emerging economy, says the central bank in its monetary policy document.
“First, targeting a positive inflation rate takes into account the technological evolution of products and their qualitative improvement. Many studies have proved that, statistically, the inflation rate has a positive value. In practice, keeping inflation close to zero may correspond to a deflationary situation,” says the central bank.
“Second, a low inflation rate helps maintain positive real interest rates. These help generate savings and financial flows to promote investments in the economy, and safeguard the banking system’s stability and its ability to carry out the financial intermediation role.”
“Third, this targeted inflation rate is consistent with the development needs of the Albanian economy as a transition economy. It facilitates the relative price movement by aiding the informative role of this mechanism in the allocation of resources within the economy. While most developed countries define price stability as an inflation rate of around 2 percent, our 3 percent target reflects the need for higher relative price volatility.”
“Fourth, the inflation target of 3 percent facilitates the convergence process with the developed economies. This target is consistent with Albania’s aspiration to join the European Union over the medium term. The goal of maintaining the rise of the price level close to, but higher than the European Central Bank’s objective below but close to 2 percent provides enough room for making the necessary structural adjustments. The target level allows a reasonable time span for real and nominal convergence of the Albanian economy with the European Union.”
Annual inflation rate hit a 15-year low of 1.6 percent in 2014, standing 0.4 percent below the central bank’s lower target limit and 1.4 percent below its target of 3 percent, according to data published by the country’s state statistical institute, INSTAT. The situation hints sluggish demand and private investments, the two key drivers of the Albanian’s growth, at a time when the economy has been suffering sluggish growth rates of 1 to 2 percent in the past three years.
The inflation rate was at 1.9 percent in 2013, down from 2.4 percent in 2012 and 1.7 percent in 2011. In the onset of the global financial crisis in 2009, Albania’s inflation rate was at 3.5 percent and slightly accelerated to 3.6 percent in 2010.
The last time the annual inflation rate was lower than 1.6 percent was back in 1999, just a couple of years after the hyperinflation fuelled by the collapse of the pyramid investment schemes, when it hit a negative 1 percent.
The low levels of inflation rate have been accompanied by slower growth in the past three years.
