The unexpected Growth of Lek; Bank of Albania decides to intervene in the market

The unexpected Growth of Lek; Bank of Albania decides to intervene in the market

 In Albania, the Central Bank announced today the decision to intervene in order to curb down the domestic currency growth, Lek, which has been strengthened significantly against the Euro, earning 3.5 points since the beginning of May, when 1 Euro was exchanged for 127.92 Lek. The Bank's Supervisory Council estimated today that "this appreciation - which was identified as a risk factor in the meeting of the Supervisory Council in May - has strengthened the pressures in propotion to inflation," Governor Gent Sejko said. In the first quarter of this year, the average inflation rate was 1.9 percent, while the Bank of Albania target is 3 percent.

For this reason, the Supervisory Council decided today to lower the key interest rate by 0.25 percentage points, lowering it to another historic minimum rate of 1 per cent. "The growth of the monetary stimulus is expected to be accompanied by further reduction of the loan interest rates and the increase of the cash flow in lek. In this way, it is expected to give an additional impetus to aggregate demand, both by reducing the cost of financing consumption and investments through the re-balancing of demand and supply for currency in the financial market," Sejko explained. Since 2011, the Bank of Albania intervened 16 times with the reduction of the key interest rate to stimulate the economy. The last two interventions were in April and May 2016.

But the spaces through the reduction of the key interest rate are limited, and its effects are not immediate but timely. While for a faster effect on curbing Lek's appreciation, the Bank also announced the takeover of foreign currency purchasing operations in the domestic market. "The currency purchasing operations will aim at eliminating the temporary foreign exchange surplus in the market and curbing further exchange rate strengthening, which would hurt the fulfillment of our target for price stability. In this way, operations will serve to supplement and strengthen the monetary stimulus, transmitted through lowering the key interest rate. Also, they will help the market to find the fair currency exchange rate against foreign currencies, in line with the stable and long-term demand and supply ratios," Governor Sejko explained, adding that "foreign foreign currency purchasing operations will preserve the necessary and sufficient time to fulfill our objectives ".

The bank had so far motivated the trend of strengthening the domestic currency, with structural improvements in the economy, while many experts related it with the inflow of eurs by illegal and mainly marijuana activities, following a massive cultivation in 2016. Today Governor Sejko explained that the appreciation "seems to reflect the creation of unilateral expectations - in the exchange rate strengthening - by foreign exchange market operators. These expectations - he explained - were triggered by information on the growth of foreign exchange supply, mainly in response to the expected conversion of capital from some banks to the system, disbursement of a foreign currency loan in favor of a public company, as well as expectations for a good tourist season. Consequently, the expectations have led both to the rise in supply and a reduction in demand for foreign currency."
The unexpected Growth of Lek; Bank of Albania decides to intervene in the market The unexpected Growth of Lek; Bank of Albania decides to intervene in the market Wednesday, June 06, 2018 Rating: 5
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