BoA to lower key interest rate again

TIRANA, Oct. 26 – Albania’s central bank decided on Wednesday to keep the key interest rate for lek, unchanged at 5 percent after lowering it by 0.25 percentage points at the end of September 2011 but hinted it would further reduce it to further stimulate the economy.Speaking at a press conference, governor Ardian Fullani said the central bank could further lower the repo rate as inflation pressures drop and the situation in the Eurozone clarifies.”Without infringing the price stability and the external equilibrium of the economy, the clarification of the situation in the Eurozone and the confirmation of our expectations on the country’s economic performance, could create the space for the another ease of the monetary policy,” said Fullani.
According to Fullani, the Albanian economy continued growing even in the third quarter of this year, but remained below its potential mainly because of sluggish private consumption affected by consumers’ hesitant behaviour related to their insecurity about their future.The performance of the domestic demand remains determinant for the economic growth, while the contribution of the fiscal stimuli is expected to be further moderated as a result of government’s need to preserve the stability of fiscal indicators, says the central bank. Government has considerably cut expenditure during the past few months as revenues stand at almost the same levels compared to the first nine months of 2010.The facilitation of monetary conditions is also expected to give a stronger support to domestic demand apart from preserving price stability.
The moderate credit growth remains another issue, first of all because of the falling demand which is also proved by central bank surveys showing falling tendency by businesses to make new investments. However, lending standards remain tight both for businesses and individuals as bad loans are reported to have reached a record 18 percent.
Economic and financial experts say the central bank should make bigger cuts to the repo rate in order to give a boost to lending which after the 2009 global financial crisis has been at slightly more than 10 percent compared to the pre-crisis levels of 30 to 50 percent.Albania’s central bank kept the repo rate at 5.25 percent from March 2011 to Sept. 2011 as inflation rates jumped above the 4 percent target.
During the first half of 2011 inflation rate was at 4.05 percent, exceeding the 3ѱ percent target by 0.05, percent during the first half of this year. However, annual inflation rate dropped to a record low of 3.1 percent in August and 2.8 September 2011, also thanks to a bigger contribution by domestic agricultural production. During the third quarter of 2011, inflation rate was at 3.2 percent year-on-year.
Soaring oil and food prices in international markets were the key reason for reason for inflation rates reaching up to 4.5 percent.
The central bank estimates that the GDP growth has preserved the early 2011 rates even in the second quarter and third of this year. Latest data published by the country’s Institute of Statistics show the Albanian economy grew by 3.4 percent in the first quarter of 2011 year-on-year with transport, industry, construction and trade as the key sectors contributing to the growth. The Albanian government expects the country’s economy to grow by 5 percent this year, twice higher compared to what international financial institutions such as the IMF and the World Bank predict for the Balkan country.
Keeping the high public debt levels, currently at the threshold of 60 percent of the GDP under control remains the key challenge for the Albanian government.