Deposit interest rates significantly drop, loan rates unchanged

TIRANA, Sept. 4 – While loan interest rates have in general remained unchanged during the past two years of the easy monetary policy the Bank of Albania has followed, interest rates on deposits have significantly dropped. Since September 2011, the Bank of Albania has cut the key interest rate by 1.75 percent to 3.5 percent in several consecutive interventions, but the moves have only been reflected on lower T-bill yields and interest rates for lek-denominated deposits.
In July 2013, interest rates on 12-month lek-denominated deposits dropped to 4.26 percent, down from 4.59 percent last June and 5.33 percent in July 2012. In September 2011, when the key interest rate was cut by 0.25 percent to 5 percent, interest rates on 12-month lek-denominated deposits stood at 5.92 percent, and have been on a downward trend since then.
Meanwhile, interest rates on lek-denominated loans have remained unchanged during the past two years, reflecting the failure of the consecutive cuts to the key interest rates in the past two years. Bank of Albania data show average interest rates on lek-denominated loans dropped to 10.93 percent in July 2013, down from 11.39 percent in July 2012. Interest rates on lek-denominated loans in September 2011 stood at 11.07 percent, only 0.14 percent lower compared to July 2013.
In its monetary policy report for the second quarter of 2013, the Bank of Albania says the failure of the monetary policy to lower loan interest rates is a result of low demand for new loans and specific problems of certain sectors of the economy as well as tighter lending standards imposed by parent Eurozone-based banking groups.
With bad loans at a record 24 percent, lending continues remaining at a historic low hardly managing to preserve positive growth rates of less than 1 percent while deposits are growing at a slightly higher rate. Latest central bank data show lending rose by 0.87 percent year-on-year in the first seven months of this year while deposits decelerated to 2.4 percent. With bad loans standing at a record 25 percent, banks continued applying tight standards even in the second quarter of 2013 while demand for new loans remained sluggish by both businesses and households, according to a central bank survey.
With lending striving to remain at positive growth rate and banks seeing government securities as one of their few investment opportunities, T-bill yields continue registering new record lows. In the latest auction organized by the Bank of Albania, 12-month T-bill yields dropped to 4.58 percent, down from 4.87 percent previously.
Experts explain the declining trend in T-bill yields with more active participation by commercial banks which have turned to investments in government securities due to poor demand for new loans as non-performing loans have reached a record 24.4 percent. The latest cut to the key interest rate to a historic low of 3.5 percent has also had a positive impact.
12-month T-bill yields have dropped to a historic low of 4.87 percent, down from 5.35 percent in the previous auction and 6.35 percent at the beginning of 2013 when the key interest rate was at 4 percent, considerably reducing the cost of Albania’s public debt currently standing at a record 62 percent of the GDP.