The cut to the key interest rate is the first for this year and the ninth consecutive slash by 0.25 percentage points since September 2011 when the central bank adopted an easier monetary policy to handle crisis impacts
TIRANA, Feb. 26 – Albania’s central bank has made a new unexpected cut to the key interest rate, taking it to a historic low of 2.75 percent in an effort to reinvigorate consumption and investments whose sluggish performance is keeping the Albanian economy on the brink of recession.
Speaking in a press conference on Wednesday, governor Ardian Fullani said the Bank of Albania Supervisory Board had decided to cut the key rate by another 0.25 percent to 2.75 percent in a new effort to promote consumption and return the inflation rate within the central bank’s 3 percent target.
The new measure is also aimed at giving a boost to lending which since the second half of 2013 has been under moderate negative growth rates. The cut to the key interest rate is the first for this year and the ninth consecutive slash by 0.25 percentage points since September 2011 when the central bank adopted an easier monetary policy to handle crisis impacts.
“The Bank of Albania expects a gradual improvement of the economic activity in 2014 but the Albanian economy will continue performing below potential even this year. The increase in excise taxes will have a lower impact compared to our initial forecasts in the 2014 inflation rate. Under these circumstances, the ease of the monetary conditions targets establishing the necessary monetary stimulus for the return of the inflation rate in its target band in the short-term,” said governor Fullani.
Albania’s central bank expects the country’s economy to register a moderate recovery in 2014 when both international financial institutions and government expect growth to slightly accelerate to 2 percent, up from an expected 0.7 percent in 2013, the poorest growth rate in the past 16 years.
The base scenario of the Bank of Albania foresees Albania’s growth will be supported by higher exports and domestic consumption and the payment of government arrears which are expected to boost demand by businesses for new loans at a time when lending has plunged into negative growth rates. The Bank of Albania stimulating monetary policy will also continue supporting internal demand through the preservation of macroeconomic stability and the injection of monetary stimulus to the economy.
“The Bank of Albanian estimates 2014 will be a turning point for the Albanian economy. The preservation of economic and financial stability, the improvement of the external environment, the pursue of stimulating macroeconomic policies and the continuation of structural reforms should pave the way for Albania’s sustainable and long-term development,” Fullani has said.
The central bank describes the mid-term reduction of the public debt, currently hovering at 70 percent of the GDP, as crucial for the country’s sustainable growth.
Inflation rate which in 2013 was at 2 percent reflected sluggish domestic consumption at a time when the central bank’s target is at 3 percent.
The Albanian economy is estimated to have grown by only 0.4 percent in the first nine months of 2013, registering its poorest performance in the past five global crisis years. The situation was a result of the GDP contracting by 2.3 percent in the third quarter of the year.
Cuts to the key rate
In mid-December 2013, the central bank cut the key rate by 0.25 percent to 3 percent in an unexpected move just three weeks after the previous cut in an effort to give a boost to the ailing economy as inflation stood at a record low of 1 percent.
The Bank of Albania’s new move came after Standard & Poor’s, one of the top three international credit rating agencies, lowered Albania’s long-term sovereign credit ratings to ‘B’ from ‘B+ with a negative outlook. The new rating means Albania is more vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments, according to S&P’s definition.
Since September 2011, the Bank of Albania has cut the key interest rate by 2.5 percent to 2.75 percent in several consecutive interventions, but the moves have only been reflected on lower T-bill yields and interest rates for lek-denominated deposits.
Despite remaining in negative growth rates for several consecutive months and the key interest rate standing at a record low, interest rates on lek-denominated loans have only slightly dropped affected by tight lending standards and high risk premia compared to low risk investments in government securities as bad loans in the banking sector stand at around 25 percent.
Latest data published by Albania’s central bank show lending dropped by 2.5 percent or 13.4 billion lek (around Euro 94 million) in the first eleven months of 2013 year-on-year, with lending to businesses down by 2.23 percent and lending to households down by 0.23 percent.
Average interest rates on lek-denominated loans dropped to 9.36 percent down from 9.67 percent in October 2013 and 10.21 percent in November 2012.
With the key interest rate at a historic low of 3 percent until this week, investing in deposits is becoming less and less profitable as interest rates stand just slightly above the average inflation rate. Central bank data show interest rates on 12-month lek-denominated deposits dropped to a historic low of 2.65 percent in November 2013, down from 2.95 percent in October 2013 and 5.25 percent in November 2012 when the key interest rate was at 4 percent.
Lek-denominated deposits accounted for 52 percent of the total deposits in November 2013.
Annual inflation rate in 2013 was at 2 percent the same as in 2012, and down from 3.5 percent in 2011.
