TIRANA, Jan, 28 – In an unexpected move, Albania’s central bank has made a another cut to the key interest rate slashing it to a new historic low of 2 percent in a bid to accelerate economic growth and prevent deflation risks after inflation rate hit a three-year low last December.
The inflation rate hit a three-year low of 0.7 percent in December 2014, hinting sluggish demand and consumption and deflation risks considering the central bank’s inflation target of 3 percent.
“This move sets the appropriate monetary conditions for the return of inflation into target and bringing the economy into equilibrium in the mid-term,” said the Bank of Albania’s supervisory council in a statement.
The central bank, which is expected to have a new governor after the theft scandal in 2014, says the easier monetary policy it has been following in the past three years continues suffering from both hesitation by businesses to engage in long-term investments and banks’ reluctance to take risks as bad loans stand at around a quarter.
The central bank has been continuously cutting key rates to promote consumption and private investments by lower interest rates and discouraging deposits, but the moves have mostly served government by securing lower interest rates for its internal borrowing through lower T-bill yields.
Since August 2011 when the key rate was at 5.25 percent, the central bank has made 13 consecutive slashes by 0.25 percentage points.
“The sustainable growth of consumption and investments will depend on the further improvement of the business climate and the deepening of structural reforms which increase productivity and strengthen the effectiveness of the monetary policy,” says the central bank.
With interest rates on loans denominated in the national currency having considerably fallen in the past couple of years, both businesses and households have shifted into borrowing in the national currency although lending in foreign currency continues dominating.
Latest data published by the country’s central bank show lending in lek for businesses increased its share to 38 percent in November 2014, up from around 35.6 percent in Nov. 2013 and only 34 percent in the same period in 2012.
Credit in euro continues dominating lending to businesses with 52 percent of the total, followed by lending in U.S dollar with around 10 percent.
The same has also happened with households with lending in euro mainly used to buy apartments sold in Europe’s single currency accounting for 50 percent, down from 53 percent in 2013.
Central bank data shows average interest rates on loans in the national currency slightly rose to 8.21 percent in November 2014, compared to a historic low of 7.66 percent in October 2014 and 9.36 percent in Nov. 2013 when the key rate stood at 3.25 percent. The slight reduction in the key interest rates reflects the poor transmission of the central bank’s monetary system in the banking system which remains liquid and profitable despite non-performing loans standing at around a quarter.
Since the onset of the global financial crisis in 2009, interest rates on lek-denominated loans which account for around one third of total lending, have dropped from an average of 13 percent to 8.5 percent in 2014 mainly affected by consecutive cuts to the key rate which has been reduced by a total of 2.5 percent in the past six crisis years.
Interest rates on 12-month lek-denominated deposits have registered a more drastic cut in the past six years dropping from an average of 6.8 percent in 2009 to an average of 2 percent in 2014. Bank of Albania data shows interest rates on lek-denominated deposits hit a historic low of 1.57 percent in November 2014, down from 1.65 percent last October and 2.65 percent in November 2013.
The declining interest rates have had a negative impact on deposits which have slowed down to 1 percent as interest rates stand below inflation rate and the withholding tax on deposits has increased by 5 percent to 15 percent starting January 2015. The declining rates and the increase in the withholding tax target discouraging investments in deposits and orienting them toward consumption and private investments.
Lending to the economy grew by 3.75 percent in the first 11 months of 2013 while deposits were up by only 1 percent.
Lending to the economy registered a turning point in July 2014 when it overcame a 12-month moderate decline of around 2 percent as the economy struggled with its poorest growth rate in more than a decade and bad loans stood at around a quarter.
