Key interest rate lowered to 4% as previous cuts fail

TIRANA, July 25 – Albania’s central bank announced this week it has cut the key interest rate by another 0.25 percent to 4 percent, the lowest ever historical rate, after previous consecutive cuts failed to either boost lending or lower T-bill yields. Speaking at a press conference on Wednesday, Bank of Albania governor Ardian Fullani said the decision would boost internal demand and consumption as a result which remains sluggish.
“The decision aims at creating appropriate conditions to fulfill the inflation target in the mid-term and stimulate demand,” said the governor, adding that low inflation pressure will allow the bank to make other cuts to the key interest rates.
For the first half of this year, inflation rate is estimated to have increased by an average of 1.5 percent, remaining 1.5 percent below the central bank’s 3 percent target. “Expected economic and inflation developments mean the preservation of the stimulating character of the monetary policy even in the near future,” added Fullani.
The central bank’s move comes after repeated calls by financial experts as a necessity to stimulate the economy following the slight shrink of the economy in the first quarter of 2012 and 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.
Governor Fullani has blamed West European banks present in Albania, which have withdrawn from government securities as the key reason for failure of the monetary policy to have an impact on lowering T-bills yields, which banks use as a reference to determine the interest rates for loans.
Implying the withdrawal of Raiffeisen, the country’s biggest bank, from Albania’s public debt in 2012, Fullani said liquidity imbalances were created causing a rise in government security yields and limiting the transmission of the monetary policy.
“The financial sector remains liquid and able to carry out its intermediation function. The economy has handled shocks from internal and foreign demand and supply which lowered the GDP, and slowed down the stabilizing policies of aggregate demand,” added Fullani.
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. Bad loans at a record 20 percent have also considerably tightened lending standards. 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.
“2012 is a challenge not only for the Albanian economy, but also the global economy, because Albania operates under conditions of a regional market of unresolved problems with trade, business, but also the Greek crisis,” governor Fullani has warned, adding that the 2012 growth will be determined by developments in consumption and private investments.