Key interest rate kept unchanged at 4%

TIRANA, Oct. 31 – The central bank has decided to keep the key interest rate unchanged at 4 percent, the lowest historical level, saying that monetary conditions were appropriate to meet inflation target in the mid-term. “The key interest rate at the lowest historical levels also ensures appropriate monetary stimulus to promote internal demand and support economic growth,” said governor Fullani at a press conference on Wednesday, adding that the central bank remains vigilant to future developments to react at the right level and time.
Low inflation pressures have allowed the Bank of Albania to cut the key interest rate by 1.25 percentage point to a historical record low of 4 percent since Sept. 2011 in an effort to stimulate the economy but the moves have been poorly reflected in lower loan interest rates and an increase in investments.
The governor said the easier monetary policy with consecutive cuts to the key interest rate has recently been positively transmitted in lower yields on government securities but has failed to lower costs for loans to the private sector which remain high in response to the banks’ perceived uncertainty as bad loans stand at a record 21 percent.
In its latest report on Albania the IMF suggest that if domestic demand were to weaken further and credit to contract, then the authorities could consider further monetary easing, provided inflation expectations remain well anchored. “However, the effectiveness of such a policy would be limited by sluggish credit demand and bank risk aversion in a weak economy, and could result in exchange market pressures,” warns the report.
Inflation rate continues remaining below the Bank of Albania three percent target, reflecting the poor consumer demand as also evidenced by shrinking retail sales. INSTAT reports the Consumer Price Index was up 2.6 percent year-on-year in Sept. 2012 driven by a 4.2 percent increase in the food and non-alcoholic beverages and a 2.6 percent rise in alcoholic beverages and tobacco prices. For the first nine months of 2012, inflation rate rose by an average of 2 percent year-on-year, remaining within the central bank’s 3ѱ percent target range
The governor has earlier warned the poor performance of domestic consumption, the key driver of the Albanian economy, could bring a spiral of threats.
“The curb of consumption as a reaction to the country’s future economic insecurity could turn into a spiral of reciprocal impacts among macro-economic indicators in Albania. The shrink in consumption is accompanied with a drop in domestic demand leading to a slowdown in economic growth and a decrease in household income at a next stage,” said Fullani.
The low level of consumption is also indirectly identified by the performance of the value added tax. The value added tax, which accounts for around 38 percent of total tax revenues, and indirectly measures consumption, grew by only 1.6 percent in Jan-Sept. 2012 but was down around 5 billion lek compared to the set target.
According to Fullani, the low levels of private investments and lending will continue keeping the economy at low growth rates. “In particular the low level of private investments during the first half of the year also reflected the household’s low demand for apartments, said Fullani. Imports of “machinery and equipment” which measure investments continue remaining at negative growth rates, while credit to the private sector grew by only 5.5 percent year-on-year in July 2012 reflecting poor demand by businesses and tight lending standards as bad loans stand at a record 21 percent.
The central bank expects economic activity to remain at low levels conditioned by the poor performance of consumption and private investments and small space for fiscal stimulus.
After shrinking by 0.2 percent in the first quarter, the Albanian economy grew by 2 percent in the second trimester. With an average growth rate of 0.9 percent during the first half of this year, the Albanian economy is reflecting clear signs of crisis from the Euro area partners and problems at home. Government’s reviewed forecast of a 3 percent growth rate for 2012 will also be difficult to achieve considering that growth rates of 5 percent for each of the two remaining quarters are needed to meet the target.
The International Monetary Fund and the European Bank for Reconstruction and Development expect the Albanian economy to grow by 0.5-0.6 percent while the World Bank has downgraded its forecast to 1 percent, citing high public debt levels and spillover impacts from the crisis in Greece and Italy. Meanwhile, government has lowered its growth expectations for 2012 to 3 percent, down from 4.3 percent earlier.
Public debt at around the legal ceiling of 60 percent of the GDP and bad loans at a record 21 percent pose a key threat to the Albanian economy.