Bank of Albania: Interest Rate Unchanged

TIRANA, April 30 – The Supervisory Committee of the Bank of Albania decided, in its meeting held on April 30, 2008, to leave unchanged its interest rate at 6.25 percent. The interest rate (known also as the repurchase rate, or refinancing rate) directly influences the price of money, bonds, bank deposits and other financial tools. Any increase in interest rates from the Bank of Albania will immediately increase interest rates in treasury bonds and increase the cost of internal debt. Commercial banks already hold treasury bonds worth some ALL 400 billion (around Euro 3.3 billion). A raise in the interest rate by only 0.2-percentage points will increase the cost of the internal debt to around ALL 1 billion (around Euro 8 million) per year.
The Supervisory Committee noted that during the first quarter of 2008, the pressures from the world economy on the Albanian economy are causing an increase in prices of raw materials and oil and their sub-products. The price increase for these products is having a short-term effect on the prices of consumer goods and is going to have a long-term effect on production costs. The import prices of corn, oil, and other staples are going to increase in the near future, putting more pressure on the Albanian economy and increasing the trade deficit.
The Supervisory Committee noticed that the inflation rate for the first quarter of 2008 was 3.7 percent, while the annual inflation rate for March was 4.6 percent compared to March 2007. The main contributor to the annual inflation rate was the groups of processed food with 3 percentage points. The increase in the price of electricity in March contributed around 0.7 percentage points to the annual inflation rate.
Facing increased inflationary pressures, the Bank of Albania three times raised the interest rate (REPO) during the last 9 months, from 5.75 percent to 6.25 percent. The Bank of Albania is satisfied in observing that increases in the interest rate are slowly producing the desired effects. The dynamics of the monetary supply is slowing down and the increase of construction prices is decelerating. However, these measures have not yet shown their full potential.
The Supervisory Committee was satisfied with the latest development in the energy sector. The Albanian Power Corporation (KESH) has increased its production and reduced its financial losses. A stable power supply is having a positive effect on production and consumption.
The Supervisory Committee declared that it is going to monitor and carefully analyse the current account deficit that increased considerably during the last year and first quarter of 2008. Imports are still increasing more than the exports. Simultaneously, remittances from Albanian migrants in Western Europe are stagnating. The Supervisory Committee warned that these developments in the current account could cause, in the long run, a disruption of exchange rates between the Albanian Lek and foreign currencies.
The Supervisory Committee praised the fiscal policy of the Albanian government as being “under control” and criticised it indirectly for “not being very active” regarding investments. The Supervisory Committee warned against the concentration of investments during the last months of the year.