Since August 2011, when the key rate was at 5.25 percent, the central bank has made 13 consecutive slashes by 0.25 percentage points to promote lending and consumption and investments
TIRANA, May 6 – Albania’s central bank decided this week to keep the key interest rate at a historic low of 2 percent and said it would continue its easier monetary policy for several quarters as inflation rate stands significantly below its 3 percent target, estimated to have a positive impact on consumption and private investment which are two of Albania’s main drivers of growth.
Inflation rate is estimated to have increased by 1.9 percent in the first quarter of this year affected by massive floods last February making agriculture products more expensive.
The Bank of Albania’s supervisory council said the transmission of the monetary policy in lower interest rates has been satisfactory but its reflection on credit growth has been slow.
“Credit growth has been slow although the banking system is well-capitalized and liquidity and profitability indicators are satisfactory. The poor performance of lending reflects both the poor demand for loans but also the banks’ conservative behavior,” says the central bank.
The Bank of Albania expects a credit recovery later this year as government has chosen to borrow from foreign markets and banks are expected to write off their bad loans.
“The shift of government borrowing from the internal market to foreign markets will set the conditions for a further reduction in interest rates and an increase banks’ interest to lend. In addition, the expected address of non-performing loans through an all-inclusive national platform will ease banks’ balance sheets and improve their approach to lending,” said the bank.
The central bank expects the aggregate demand to be the main driver of Albania’s growth in the short and mid-run, but says structural reforms are needed to produce sustainable growth.
“Structural reforms must target increasing the productivity of the Albanian economy and expanding into new markets. Among others, this will be carried out through the construction of a modern development infrastructure, establishing a favourable business climate and ongoing investments to improve the quality of human resources,” said the bank.
The last time the Bank of Albania cut its rates was in late January 2015, when the key rate was cut a new historic low of 2 percent in a bid to accelerate economic growth and prevent disinflation risks after inflation rate hit a three-year low last December.
The central bank has been continuously cutting key rates to promote consumption and private investments by lower interest rates and discouraging deposits, but the moves have mostly served government by securing lower interest rates for its internal borrowing through lower T-bill yields.
Since August 2011, when the key rate was at 5.25 percent, the central bank has made 13 consecutive slashes by 0.25 percentage points.
