Key interest rate cuts fail to lower loan costs

TIRANA, April 2 – 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 not been reflected at all in lowering interest rates for loans in the domestic currency lek, and T-bill yields. Latest data published by the Bank of Albania show average interest rates for loans in lek rose to 11.4 percent in Feb. 2012 when the key interest rate was at 4.5 percent compared to 11.1 percent in Sept. 2011 when the key rate stood at 5.25 percent.
The opposite has happened with interest rates for Euro-denominated loans which hold the majority of 65 of credit in Albania. Since Nov. 2011, when the European Central Bank cut the key interest rate by 0.25 percent to 1 percent, average interest rates for loans in Euro have dropped from an average of 7.5 percent in Sept. 11 to 6.9 percent in Feb. 2012.
The key interest rate cut have also been reflected in deposit interest rates which have dropped from an average of 5.9 percent in Sept. 2011 to 5.6 percent in Feb. 2012.
12-month T-bill yields have also been on upward trend since Dec. 2011 climbing from 6.95 percent to 7.34 percent in March 2012.
Ermelinda Meksi, a member of the Bank of Albania Supervisory Board says low internal demand and a decrease in investments are making key interest rate cuts not directly reflect on the economy. Government’s tight fiscal policy in order to keep public debt, currently at the legal threshold of 60 percent of the GDP, have made interventions by the central bank more frequent in the past year, BoA experts say, assuring that other key interest rate cuts could be made if the economy continues its slowdown.
The key interest rate cuts have also had a minor impact on boosting lending as bad loans, at a record 19 percent in 2011, have forced banks to considerably tighten lending standards. Businesses have also cut demand for new loans as domestic consumption remains at low levels and the market seems to have reached a saturation point.
Latest Bank of Albania data show credit to the economy grew by only 0.12 percent in Jan-Feb. 2012 compared to Dec. 2011 but was up 11 percent compared to the first two months of 2011.