BoA urged to make new key interest rate cut

TIRANA, July 11 – Economy experts say a new cut in the key interest rate is needed to give a boost to the ailing economy which in the first quarter of 2012 suffered a slight shrink. The call comes few days after the European Central Bank cut its key interest rate by a quarter percentage point to a record low 0.75 percent to try to help ease Europe’s financial crisis and boost its sagging economy. The action, which was widely expected, is meant to make it cheaper for businesses and consumers to borrow and spend money.
Experts say the Albanian central bank must further lower its key interest rate, currently at 4.25 percent and promote competition in the financial market while government must deepen reforms to liberalize the market.
Artan Gjergji, an economic expert says the short-term measure to stimulate the economy is that the central bank cuts its key rate in the next meeting of its Supervisory Board at the end of July, favouring a bigger cut of 0.5 percent. In the long-term, Gjergji suggests structural reforms in the banking sector to increase competition due to the fact that banks are not so reactive toward the monetary policy interventions.
Zef Preci, the director of the Albanian Institute for Economic Studies, also recommends the central bank should further ease the monetary policy.
“A lower cost of money because of the lower interest rate with EU countries automatically lowers the external debt cost. But in Albania, the external debt accounts for around one-third of total public debt which means the biggest impact is expected to be direct and it is advisable that the central bank reflects on this basis by further lowering its key rate and increase its controlling power so that measures of this nature are reflected on end users, business and household borrowers,” said Preci.
According to him, the central bank decision should also be reflected in lower interest rates for Euro-denominated loans which account for more than 60 percent of total lending.
High interest rates, tight lending standards and a sharp decrease in demand are the key reasons lending is failing to recover this year. Although having lowered the key interest rate by 1 percentage point to a historical record low of 4.25 percent since Sept 2011, the Bank of Albania interventions in the monetary policy have been poorly reflected in lowering interest rates for loans in the domestic currency lek, and T-bill yields. While average interest rates in May 2012 stood at 11.3 percent, interest rates reach as high as 14.5 percent for 1 to 3-year loans in lek. Meanwhile, interest rates for lek-denominated deposits slightly rose to 5.7 percent in May 2012, up from 5.6 percent in April 2012 and 5.9 percent in Sept. 11 when BoA started cutting the key rate.
Both lending and deposit growth rates stood at the same levels of around 11 percent during the first quarter of 2012, revealing an ongoing saving trend and hesitation about new investments as domestic consumption fails to recover. In the 2009-2011 period, lending grew at moderate rates of 10 to 13 percent annually compared to the pre-crisis levels of 30 to 50 percent.
In late June, Governor Fullani announced the BoA Supervisory Council has decided to keep the key interest rate unchanged at 4.25 percent, considering the monetary conditions as appropriate to meet the inflation rate target in the mid-term, and offering the necessary stimulus to support aggregate demand. For the first five months of this year, average inflation rate has been at 1.34 percent, far below the central bank’s target of 3 percent reflecting the poor consumer demand as also shown by the performance of government revenues. Fullani said the central bank could further review the monetary policy following government’s reconfirmation to continue the fiscal consolidation with the expected mid-year budget cuts.