Average interest rates on lek-denominated loans registered a historic low of 7.96 percent in March 2014, down from 9.14 percent in February 2014 and 11.14 percent in March 2013.
TIRANA, May 6 – Two months after the key interest rate was cut to a historic low of 2.75, the transmission mechanism of the central bank’s monetary policy is finally having a positive impact on reducing the cost of borrowing for households and businesses. However, the cut in deposit interest rates has been drastic and for the first time stands below inflation rate, making investments in deposits little attractive.
The lower interest rates could give a new impetus to lending which since the second half of 2013 has plunged to moderate negative growth rates of around 2 percent as non-performing loans stand at around a quarter and demand remains low by both households and businesses at a time when the Albanian economy is struggling with its poorest growth rates in more than a decade.
Average interest rates on lek-denominated loans registered a historic low of 7.96 percent in March 2014, down from 9.14 percent in February 2014 and 11.14 percent in March 2013.
Meanwhile, interest rates on Euro-denominated loans also slightly dropped to 6.93 percent, down from 6.94 percent in February 2014 and 6.85 percent in March 2013.
The situation with interest rates on deposits appears more critical with interest rates on 12-month deposits having dropped to a new record low of 2.16 percent, down from 2.46 percent in February 2014 and 5.36 percent in March 2013. The cut in interest rates means depositors are only being indexed to inflation which climbed to 2.2 percent in March 2014.
In 2009, soon after the outbreak of the global financial crisis and when the key rate was at 5.75 percent, interest rates on lek-denominated deposits stood at an average of 6.8 percent while annual inflation rate averaged at 2.3 percent.
Interest rates on 12-month Euro denominated deposits also dropped to 1.23 percent down from 1.46 percent in February 2014 and 2.84 percent in March 2014.
Bank of Albania data show lending was down by 2.1 year-on-year in the first quarter of this year with credit to individuals up by only 0.5 percent and loans to businesses down by 3 percent in the first quarter of 2014.
Meanwhile, deposits continue their slowdown, growing by only 1.9 percent in the first quarter of this year also affected by 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.
Bank of Albania data shows deposits grew by only 2.2 percent or 20.8 billion lek (Euro 145 million) in the first 11 months of 2013. Deposits grew by 6.3 percent in 2012, down from 11.7 percent in 2011, unveiling the downward trend in consumers’ saving trend.
Data show lending to the economy shrank by 1.25 percent in 2013, registering the first decline in the past five global crisis years. 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 as bad loans hit more than 22 percent.
The situation reflects a critical situation in the banking system which remains liquid and well-capitalized but faces a record high of around 25 percent in non-performing loans. Apart from poor demand for new loans, tight lending standards applied by banks and high interest rates have also influenced on lending which has been at moderate negative growth rates since the second half of 2013.
Since September 2011, the Bank of Albania has cut the key interest rate by 2.25 percent to 3 percent in several consecutive interventions, but the moves had only been reflected on lower T-bill yields and interest rates for lek-denominated deposits. Yields on T-bills, the key instrument of government’s domestic debt, have dropped to 3.5 percent, almost half of the 6.6 percent in January 2013.
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.
Lending in the national currency lek has gained around 8 percentage points in the past four years and now accounts for one third of the total credit portfolio compared to only a quarter just before the onset of the global financial crisis in 2008. Data published in the latest BoA supervision report show lending in the national currency climbed to 35.5 percent at the end of 2012, compared to only 27.4 percent at the end of 2008.
In late February 2013 Albania’s central bank cut the key rate by another 0.25 percent to 2.75 percent while the European central bank has kept the key rate unchanged at 0.25 percent.
With growth in 2013 registering a record low of 0.44 percent for the past 16 years, the central bank says it can’t do much under this situation and that structural reforms are needed to overcome the situation.
“All stakeholders must work more on the improvement of the business climate, the development of a new growth model based on productive activities and exports and the solution of legal problems still present in the execution of collateral,” central bank governor Fullani has said.
“Not everything can be solved by the monetary policy and not everything can be carried out by the central bank. The new approach should target the creation of favourable climate on investments and boosting demand, increasing productivity in competitive sectors, supporting technological development and improving education and implementing reforms in the labour market,” he added.
Inflation rate drops to 1.7 percent
Inflation rate dropped to 1.7 percent in April 2014, remaining below the central bank’s lower limit of the target range of 2 to 4 percent. After remaining for eight consecutive months below the lower limit of the central bank’s target range of 2 to 4 percent, reflecting the sluggish growth of Albania’s economy, inflation rate jumped above 2 percent in March 2014, showing signs of a recovery in domestic demand.
Data published by the country’s state statistical institute, INSTAT, show inflation rate grew by 1.7 percent year-on-year in April 2014, with food and non-alcoholic beverages having the key contribution with 0.7 percent.
At an average of 1.9 percent in the first quarter of this year, inflation rate remains below the central bank’s target despite an increase in fuel and tobacco prices fuelled by the higher taxes in force since January 2014.
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.
Albania’s central bank estimates that by preserving the inflation rate 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.
