Bank of Albania data show average interest rates on lek-denominated loans rose to 9.41 percent in May 2014, up from 8.88 percent in April 2014 and a historic low of 7.96 percent in March 2014 despite the key rate standing at a record low of 2.5 percent.
TIRANA, June 30 – Interest rates on loans denominated in the national currency suffered a surprise increase in May 2014 despite the key interest rate being cut to a historic low of 2.5 percent, reflecting the poor transmission of the central bank’s easier monetary policy as bad loans stand at around a quarter.
Bank of Albania data published this week show average interest rates on lek-denominated loans rose to 9.41 percent in May 2014, up from 8.88 percent in April 2014 and a historic low of 7.96 percent in March 2014. However, average interest rates have dropped by 1.64 percent compared to May 2013 when they stood at 11.05 percent.
Meanwhile, average interest rates on Euro-denominated loans dropped to 6.48 percent in May 2014 just before the European central bank cut the key rate to a new historic low of 0.15 percent, down from 7.03 percent last April and 6.72 percent in May 2013.
The situation with deposits continues deteriorating with Albanians’ savings hardly managing to maintain positive growth rates, especially because of interest rates having dropped to a record low and at around the same level to annual inflation rate.
Average interest rate on lek-denominated deposits dropped to a historic low of 1.94 percent in May 2014, down from 2.21 percent last April and 5.11 percent in May 2013.
Meanwhile, average interest rates on Euro-denominated deposits also dropped to a historic low of 1.01 percent, down from 1.21 percent last April and 2.4 percent in May 2013.
Albania’s central bank has decided to keep the key interest rate unchanged at a historic low of 2.5 percent as inflation rate during this year stands below the central bank’s lower limit of the target range of 2 to 4 percent, a situation reflecting sluggish internal demand which is the key driver of Albania’s growth.
INSTAT data shows average inflation rate for the first five months of this year was at 1.82 percent, remaining far below the Bank of Albania’s target of 3 percent.
With lending continuing remaining at moderate negative growth rates of around 2 percent and inflation rate below the target, the central bank made a new cut to the key interest rate in late May 2014 an effort to give a boost to consumption and private investments whose sluggish performance is affecting growth.
The cut to the key interest rate was 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.
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.
Lending, deposits at a standstill
Latest data published by the Bank of Albania show lending to the economy slightly recovered in May 2014 when it declined by 1.66 percent year-on-year, down from 2.15 percent in April 2014. Meanwhile, deposits grew by only 0.86 percent year-on-year in May 2014, 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.
