TIRANA, Nov. 4 – Albania’s central bank announced this week it has cut the key interest rate by another 0.25 percentage points, taking it to a new historic low of 1.75 percent in an effort to give a new boost to sluggish consumption and lending which are holding back economic recovery.
The cut is the second for this year and the fourteenth consecutive slash since August 2011, when the key rate was at 5.25 percent.
The central bank’s move comes at a time when lending has plunged to moderate negative growth rates due to poor demand by both businesses and households and tight lending standards as non-performing loans stand at 20 percent and inflation rate remains below its 3 percent target, hinting sluggish consumption.
Since late 2011, the central bank’s easier monetary policy has been mostly reflected on deposit rates and T-bill yields on government’s internal borrowing, rather than lower loan interest rates.
The loan rates, although considerably lower compared to the pre-crisis period, are still considered high and unaffordable by the business community because of being six times higher compared to the deposit rates which have dropped below the average inflation rate for the past year.
Speaking at a press conference on Wednesday, central bank governor Gent Sejko said the new monetary impulse will support the recovery of consumption, investments and lending.
“The monetary stimulus offers the necessary time to complete structural reforms and reduces the cost of these reforms in the economy, but is not able to guarantee long-term economic growth and should not be seen as their substitute,” said Sejko.
Appealing for accelerated structural reforms, the governor said “these reforms should target the sustainable improvement of the business climate, increasing the productivity and competitiveness of the Albanian economy, promoting domestic and foreign investments and the country’s sustainable economic and financial growth.”
Albania’s business climate suffered a major setback in the past year, losing 35 places in the latest World Bank Doing Business report to rank 97th on a sharp deterioration in dealing with construction permits
The Bank of Albania expects inflation rate to remain below its 3 percent target, which is estimated to have a positive impact on the country’s growth, until early 2018.
The central bank estimates that despite ample liquidity banks continue remaining too risk averse and with little commitment to finance long-term projects as indicated by the performance of credit. Lending suffered another blow last September when it contracted for the second month in a row, extending its year-on-year decline to 1.8 percent.
Albania’s central bank says that it will continue applying an easy monetary even during 2016 because of low inflation pressure.
The measure is aimed at boosting consumption, investments and lending already at sluggish growth rates by discouraging investments in deposits through lower interest rates at a time when inflation rate remains significantly below the central bank’s 3 percent target.
While savings by households have considerably been discouraged as interest rates stand below average inflation rates, lower interest rates on lek-denominated loans have failed to boost consumption and private investments, two of the country’s key drivers of growth.
Average interest rates on lek-denominated loans, which account for around 40 percent of total credit, rose to 8.18 percent last September, down from a record low of 7.73 percent last August, 8.46 percent in Sept. 2014, 10.14 percent in Sept. 2013 and 11.1 percent in Sept. 2012.
Meanwhile, average interest rates on 12-month deposits slightly rose to 1.27 percent last September, down from a historic low of 1.04 percent last August, significantly below the Sept. 2015 inflation rate of 2.2 percent.
GDP growth revised down to 2.5%
Central bank governor Gent Sejko also announced the central bank has revised downward its GDP forecast for 2015 to 2.5 percent, down from a previously revised 2.7 percent and an initial expectation of 3 percent in early 2015 on sluggish consumption and poor performance of Albanian exports affected by spillover effects in key trading partners, crisis-hit Italy and Greece.
The Albanian economy grew by 2.65 percent in the first half of this year and seemed on track to achieve its new revised target of 2.7 percent for 2015, but the poor performance of domestic consumption is having a strong impact. The nationwide electricity and tax evasion campaigns have also had an effect on curbing household consumption, in addition to some 40,000 Albanians who have left the country this year to seek asylum, mainly in Germany, with a considerable impact on the small Albanian market of 2.8 million residents now that the tourist season is over.
The spillover effects from Greece have also increased as the neighbouring country, the host of 500,000 Albanian migrants struggled to reach a bailout deal on its debt crisis and the ongoing crisis there is expected to further affect exports and remittances.
The Albanian government and the IMF have recently revised Albania’s 2015 GDP growth forecast to 2.7 percent down from an initial 3 percent on lower international oil prices affecting exports and spillover impacts from the crisis in neighboring Greece.
Revised INSTAT data shows the Albanian economy grew by 2.17 percent in 2014, up from 1.11 percent in 2013, 1.42 percent in 2012, an average of 3 percent in 2010 and 2011 and a pre-crisis decade of 6 percent.
