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Albania Watch: February inflation lull or long-term trend?

Inflation took a surprise tumble in February, hitting a 2-year low! But net core inflation remains sticky, and rising wages threaten to reignite price pressures. The central bank is taking a wait-and-see approach, keeping rates steady for now. However, we expect them to hike again later this year as inflation potentially heats up again. The battle against inflation is far from over. Will BoA be able to navigate this economic rollercoaster?

February inflation dips to a 2-year low, but is it here to stay?

Data released for February revealed inflation was running cooler than anticipated. The figures, which fell below our forecasts, mark a welcome reprieve for consumers who have been grappling with rising prices in recent months. This unexpected slowdown offers a glimmer of hope that inflationary pressures might be easing, potentially paving the way for a more stable monetary policy.

In February headline inflation clocked in at just 2.6% yoy, down from 3.4% the previous month. In mom terms, the prices went up by 0.3% compared to January. At the same time, core inflation rose by only 0.01% mom, suggesting that price pressures were markedly lower among items included in the core basket. Transportation costs are leading the yoy deceleration in headline inflation, dropping by 1.6% yoy, helping bring down the overall inflation rate. In addition, lower price increases were also seen in food & beverages, furniture, entertainment, and hospitality, while food prices remain a key factor, although they are rising at a slower pace (2.7% yoy). However, we expect the comparison base to ease in the coming months, followed by two reflation rounds during the year.

Main drivers of the change in headline CPI (%)

Source: Instat

February lull or long-term trend?

Core inflation remained nearly flat in February, rising only 0.01%. BoA’s latest estimates showed a continued moderation in core CPI inflation, which reached 2.9% and 2.91% yoy in January and February. This represents a further easing from the 3.2% yoy increase observed in Dec 2023. Potential factors contributing to the yoy slowdown likely include external influences with declining foreign market prices and the Lek's significant appreciation, in our view. Another factor is the high base effect, as core inflation accelerated rapidly in late 2022, peaking at 8.5% yoy in Q4.

Despite the downward movement in both inflation and core inflation, we project inflationary pressures will persist, considering that the labour market continued to strengthen in Q4 2023, with unemployment remaining steady at 10.7% and the employment rate increasing by 0.2% percentage point to a robust 66.7% versus the same quarter of last year. In addition, average gross monthly salaries saw a substantial increase of 13.7% yoy, reaching ALL 75,025 in Q4 2023. In line with these developments, the continued, fast and double-digit growth of wages continues to be flagged as a major pro-inflationary factor. We also expect the high base effect to diminish in the coming periods, hence two inflationary rounds during the year take our inflation expectations around 3.5% and 3.6%, with BoA potentially falling short of its year-end inflation target.

Source: Instat, BoA, RBI/Raiffeisen Research

Base rate freeze: the central bank holds the line and navigates uncertain inflation path

BoA hit the brakes this month, keeping the base rate at 3.25%, citing that despite internal inflationary pressures remaining elevated, inflation is expected to converge to target throughout 2024 and reach the 3.0% target by the end of the year. Looking at the bigger picture, inflation has dipped thanks to lower import costs. However, domestic inflation, though decreasing slightly, remains more persistent. Net core inflation (which excludes volatile items and provides a clearer picture of mid-term inflation trends) held steady at around 3.3%, according to BoA, the same as the previous quarter. This suggests ongoing domestic price pressures due to strong demand for goods and services, as well as factors related to the labour market.

While BoA is taking a wait-and-see approach, we expect them to slam on the brakes twice more later this year—once in Q3 and again in Q4. We project hotter inflation during the summer months, mainly due to the strong tourism season ahead, further wage increases, and higher oil prices in the international market. However, the inflation deceleration is happening faster than expected at the beginning of the year. Hence, we adjusted our projections and now forecast the base rate to reach 3.75% by the year’s end, instead of 4.5% previously projected.

Source: BoA, RBI/Raiffeisen Research


In the bottom line, the BoA’s pause on interest rates doesn't signal the end of the inflationary rollercoaster, in our view. Despite a welcome February cool-down in headline inflation, the Bank of Albania (BoA) maintains a cautious outlook. While lower import costs and a strong Lek contribute to the current slowdown, persistent domestic price pressures fueled by a robust labour market and wage growth raise concerns about future inflation. With the high base effect from late 2022 fading, we anticipate two reflationary rounds this year. Although BoA is currently holding the line on interest rates, we expect them to raise rates twice later in 2024 to combat inflation, with the projected base rate reaching 3.75% by year-end. The fight against inflation appears to be a marathon, not a sprint, and BoA will need to navigate this inflationary rollercoaster carefully in the coming months.

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Fjorent RRUSHI

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Fjorent is the head of ALM & Research for Raiffeisen Bank Albania. After a MSc in International Business from the University of Trieste and an MBA from MIB School of Management in Italy he started as an Investor Relations financial analyst at the aerospace & defense company Leonardo in Rome. After that he moved to the Italian Stock Exchange in Milan promoting blue chip companies through roadshows with institutional investors and after the merger with London Stock Exchange was in charge of primary markets of potential to be listed companies in Eastern Europe. In 2011 moved back to his native country to join Raiffeisen Bank in ALM & Research team in charge of fund transfer pricing, liquidity management and IRRBB. After a period at Intesa Sanpaolo Bank Albania as Head of pricing starting from 2021 he is heading the ALM & Research of Raiffeisen Bank Albania. Apart from macroeconomic analysis of particular interest for him is the disruptive technological transformation impacting the banking system. Fjorent’s hobby is football and he enjoys theatre and has been an amateur player as a teenager.

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Aristea VLLAHU

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Aristea joined Raiffeisen Bank Albania in 2019 and is part of the ALM & Research team, currently responsible for liquidity risk and macroeconomic research in Raiffeisen Bank Albania. Her previous experience in Asset & Liability Management at Raiffeisen included interest rate risk management, interest sensitivity of income and stress testing. Holding a BA in Economics and a MSc in Finance, she further deepened her knowledge by becoming a CFA charterholder.