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The Euro-Lek exchange rate deepened its decline on Thursday and dropped below the level of 103 Lek, for the first time since mid-December 2023.
According to the exchange rate of the Bank of Albania, the Euro was exchanged on Monday at 102.74 ALL, the lowest level since December 13. The Euro exchange rate is down by 10% compared to the same period a year ago. As usual, significant movements in a certain direction of the Euro exchange rate are also transmitted to the exchange rate of other major currencies. The American dollar was exchanged on Thursday at 94.12 ALL, the lowest level since December 29. The British pound also recorded the lowest level since the beginning of January, at the value of 120.2 lek.
With the exit from the winter season, the Lek has started a new strengthening cycle in the exchange rate. A similar trend (but which took shape a little later, in the last week of March) was noted last year as well. Market agents think that the return of the strengthening of the Lek is the result of the increase in foreign currency flows from abroad, which are now mainly related to tourism, the export of services in general, but also to a high interest of foreign investors in the real estate market in Albania. Last year's data showed a record increase in the number of foreign tourists and, at least until the end of the 9th month of 2023, the best historical result of the balance of payments. The expectation of financial agents is that the pressure on the Euro exchange rate will continue throughout the second quarter of the year.
The further strengthening of the Lek on the one hand will further reduce the imported inflation in the economy. In yesterday's statement, the Supervisory Council of the Bank of Albania estimated that imported inflation has made the main contribution to reducing inflation during the first part of 2024. If the strengthening of the Lek will continue, it is likely that the exchange rate will strengthen the trend disinflationist. In such a scenario, Albania can decide sooner than expected before the dilemma to change the direction of the monetary policy, starting to lower interest rates. Last summer, the Euro exchange rate touched the lowest historical level, very close to the limit of 100 lek. The trends that are emerging this year show that market forces project breaking this record as quite possible.
The strengthening of the Lek has helped to reduce inflation and has significantly helped to maintain the quality of the foreign currency loan portfolio, amortizing the increase in interest rates in Euro. But, on the other hand, the strong Lek has significantly damaged the exporting sectors of the economy, especially fashion. The figures show a decline in goods exports even at the beginning of this year. A further strengthening of the Lek could hit even more the exporting sectors of the economy, starting with tourism.
Albania has a free exchange rate regime, but in the event that the strengthening of the Lek would lead to a further drop in inflation below the target, the Bank of Albania would be in a situation where intervention in the exchange rate could be justifiable./ Monitor
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