How many shocks did the exchange rate experience in 2024? - IMF: The size of interventions in the foreign exchange market, as much as 2.6% of GDP
The International Monetary Fund suggests to Albania that in order to stabilize the exchange rate and keep inflation under control through the latter, the Central Bank should not rely solely on interventions in the foreign exchange market, but should also play with interest rate policy.
In a recently published document, the International Monetary Fund (IMF) describes Albania as a small, emerging market economy with a floating exchange rate regime that aims to keep inflation under control. As a result of strong macroeconomic performance and a tourism boom, the lek has been on a steady appreciation trend against the euro. To curb appreciation pressures, the Bank of Albania has intervened in the foreign exchange market, with the size of interventions during the first nine months of 2024 reaching 2.6% of nominal Gross Domestic Product (GDP) in 2023, almost three times the amount in the same period in 2023.
According to the IMF, the share of loans not hedged by exchange rates has fallen from 50% of total loans in 2014 to around 25% in 2024. Despite this decline, the International Monetary Fund emphasizes that the real estate sector continues to pose a risk, once again calling for a curb on loans granted for real estate. This sector accounted for two-thirds of loans not hedged by exchange rates in 2024.
The International Monetary Fund highlights that the exchange rate experiences two types of shocks, a fundamental shock from the tourism boom and a non-fundamental shock from sudden cash inflows, as a result of changing investor behavior.
While recent assessments suggest that exchange rate fluctuations may be transmitted to inflation, inflation expectations appear well anchored. The IMF also states that monetary policy can support a sustained return of inflation to target, without the need for intervention in the foreign exchange market.
Monetary policy appears to be an appropriate tool to cushion exchange rate shocks from tourist inflows. Therefore, there is a case for additional easing of interest rate policy. In this alternative scenario, additional policy rate cuts are assumed for simplicity to compensate for the appreciation of the lek. As a result, the output gap narrows and inflation moves closer to target, avoiding volatile interest rate movements.
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