The cut to the key interest rate is the second for this year and the eleventh consecutive slash by 0.25 percentage points since September 2011 when the central bank adopted an easier monetary policy to handle crisis impacts.
TIRANA, June 2 – With lending continuing remaining at moderate negative growth rates of around 2 percent and inflation rate below the target, the central bank has made a new cut to the key interest rate in an effort to give a boost to consumption and private investments whose sluggish performance is affecting growth.
In a decision made on May 30, the central bank’s supervisory council announced it has cut the key rate by another 0.25 percent to a new historic low of 2.5 percent as inflation rate for the first four months of the year is estimated at 1.9 percent, just below the central bank’s lower limit of the target range of 2 to 4 percent, reflecting sluggish domestic consumption.
Albania’s central bank estimates that by preserving the inflation rate at around the 3 percent rate, the monetary policy will continue having a positive contribution to the development of the Albanian economy. “This targeted inflation rate and the monetary policy applied for its achievement, positively affects the stability of economic growth rates, as has been proved in recent years,” says the central bank. The annual inflation rate in 2013 was estimated at around 1.9 percent, down from 2 percent in 2012, but far lower compared to 3.5 percent in 2011 and 3.6 percent in 2010.
Speaking at a press conference after the central bank’s decision, governor Ardian Fullani said the “the cut to the key interest rate targets giving a further impetus to consumption and private investments, creating conditions for lower financing costs in the banking system.”
The central bank estimates that the performance of the Albanian economy in the short run will depend on the progress of private investments and consumption, two components of aggregate demand which have been facing sluggish growth in the past couple of years.
The cut to the key interest rate is the second for this year and the eleventh consecutive slash by 0.25 percentage points since September 2011 when the central bank adopted an easier monetary policy to handle crisis impacts.
However, the moves have mostly been reflected on lower interest rates for lek-denominated deposits and T-bill yields, which have almost halved during the past year, while interest rates on lek-denominated loans have registered only a slight decline.
“The cuts to the key rate have already been transmitted to interest rates in the interbank market, deposits and in most government security yields. Loan interest rates have also reflected the stimulating policy followed by the Bank of Albania but they continue carrying high risk premia and other risks related to long-term investments,” said Fullani, also appealing to the 16 commercial banks which are overwhelmingly foreign-owned to be more active in lending “because the country’s sustainable growth is a precondition for the sustainable growth of the banking system itself.”
The central bank expects the Albanian economy to register gradual growth in the next quarters supported by exports and domestic private demand.
Double digit growth rates in VAT and a slight recovery in imports of machinery, equipment and spare parts in the first four months of this year hints the Albanian economy has made progress in domestic consumption but still lags behind in private investments.
Data published by the country’s state statistical institute, INSTAT, show the Albanian economy grew by only 0.44 percent in 2013, down from 1.3 percent in 2012, an average of 3.4 percent annually from 2009 to 2011 and a pre-crisis decade of an average 6 percent.
Prospects for 2014 appear slightly more optimistic with international financial institutions and government expecting growth to slightly accelerate to 2 percent as top trade partners Italy and Greece are forecast to escape recession.
Lending, deposits at a standstill
Latest data published by the Bank of Albania show lending to the economy shrank by 2.15 percent year-on-year in April 2014 while deposits were up by only 0.5 percent, the lowest growth rate since late 2008 and early 2009 when banks in Albania witnessed panic deposit withdrawals in the face of spillovers from instability of global financial markets which were compounded by concerns about the health of the Greek banking system in the fall of 2008.
After growing by 30 to 50 percent annually in the pre-crisis years, lending grew by an average of 10 percent from 2009 to 2011 but sharply decelerated to 2.36 percent in 2012 and shrank by 1.25 percent in 2013 as bad loans hit a record of 24 percent.
Differently from loans, 63 percent of which are issued in foreign currency, mainly in Euro, the situation with deposits appears more balanced with lek deposits accounting for 52 percent of total deposits.
Central bank data show the deposit growth slowed down to 2.1 percent in 2013, down from 6.3 percent in 2012, and 11.7 percent in 2011, unveiling the downward trend in consumers’ saving trend. The slowdown in deposits is also a result of sharp cuts in interest rates and more favourable interest rates in the emerging investments funds.
“While these funds have helped diversify the ownership of government securities, they are inadequately supervised and regulated, invest mostly in longer-dated securities and their clients appear to consider these funds as substitutes for bank accounts,” warns the IMF in its latest report.
Loan interest rates remain high
Interest rates on lek-denominated loans suffered a slight increase in April 2014 after reaching a historic low of 7.96 percent in March 2014. Average interest rates on lek-denominated loans rose to 8.88 percent in April 2014, up from 7.96 percent in March 2014 and 10.83 percent in April 2013.
Average interest rates on euro-denominated loans slightly rose to 7.03 percent in April 2014, up from 6.93 percent last March and 7.05 percent in April 2013 unaffected by the European Central Bank’s key rate at a record low of 0.25 percent.
Meanwhile, yields on T-bills, the key instrument of government’s domestic debt, have dropped to 3.36 percent, almost half of the 6.6 percent in January 2013.
The situation with deposit interest rates remains critical with interest rates at almost the same levels as average inflation rate.
Interest rates on 12-month lek-denominated deposits slightly rose to 2.21 percent in April 2014, up from a historic low of 2.16 percent last March and 5.04 percent in April 2013.
Interest rates on 12-month Euro-denominated deposits also dropped to a record low of 1.21 percent, down from 1.23 percent last March and 2.41 percent in April 2013.
More than half of Albanian businesses consider high interest rates as the key barrier in borrowing from banks, according to a survey carried out by the Bank of Albania. Businesses also consider credit insurance terms, the appropriateness of the credit structure and lack of transparency in the approval and monitoring of loans by banks as factors of average difficulty.
