TIRANA, May 25 – The country’s central bank says it has ruled out applying quantitative easing to boost sluggish lending and consumption as an alternative offering limited benefits to the Albanian reality where the banking system has ample liquidity but suffers poor demand and tight lending standards as non-performing loans remain at 18 percent.
Speaking in a recent interview, central bank governor Gent Sejko said the Bank of Albania will continue applying its easier monetary policy through cuts to the key interest rate in order to handle disinflation and sluggish consumption and credit.
“The Bank of Albania is exploring the cost-benefit ratio offered by alternative instruments of the monetary policy. This does not mean we are preparing to use the monetary easing instrument. This is only one of the alternative monetary policy instrument and furthermore the instrument offering the lowest benefits to the Albanian reality,” said Sejko.
The Albanian banking system has been liquid and profitable during the past crisis years despite a sharp rise in non-performing loans.
Governor Sejko says the central bank will consider making new cut to the key interest rate, currently at a historic low of 1.25 percent, in case of further downside risks such as deflation risk or sluggish consumption, investment and credit.
“The possible adoption of these instruments should be carried out by carefully studying the characteristics of the Albanian financial market which has a high level of short term liquidity. For this reason, the quantitative easing option does not display any obvious benefit. In addition, lack of alternative financial instruments prevents the use of credit easing which has the presence of liquidity pressure and problems in certain segments of market as a precondition for success,” said Sejko.
Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply, successfully applied by the U.S. Federal Reserve and the European Central Bank to stimulate economies after the outbreak of the global financial crisis in 2008.
Since late 2011, the central bank’s easier monetary policy has been mostly reflected on deposit rates and T-bill yields on government’s internal borrowing, rather than lower loan interest rates which are still considered high and unaffordable by the business community because of being seven times higher compared to the deposit rates following their drop to below 1 percent.
Earlier this month, the central bank cut the key rate to a new historic low of 1.25 percent and revised downward the country’s 2016 economic outlook to 3 percent as inflation rate remained close to zero for the third month in a row in an unprecedented situation for the past 15 years although authorities have downplayed deflation concerns with the sharp cut in international oil and food prices. The country’s central bank says Albania’s is experiencing a disinflationary situation as inflation rate has not registered negative growth rates yet in order to plunge into deflation.
However, its surprise cut to the key interest rate last week to a new historic low of 1.25 percent despite the poor transmission of the monetary policy into lower lending rates and higher credit reflects its concerns.
In its monetary policy document, the central bank says that “in practice, an inflation rate close to zero could correspond to a deflationary situation.”
Latest Bank of Albania data shows average interest rates on lek-denominated loans dropped to 7.3 percent last March while deposit rates in the national currency fell to a historic low of 0.94 percent in March 2016 just before the key rate was cut to a new all-time low of 1.25 percent.
