TIRANA, Jan. 5 – Interest rates on lek-denominated loans registered a surprise increase in November 2014 when the country’s central bank cut the key interest rate to a new historic low of 2.25 percent in a new effort to stimulate sluggish lending and consumption through lower interest rates.
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.
Bank credit in Albania where subsidiaries of foreign banks represent about 93 percent of total banking sector assets is funded largely by local deposits which has further increased profits by the 16 commercial banks operating in the country.
With the European Central Bank having lowered the key interest rate to a historic low of only 0.05 percent, interest rates on euro-denominated loans and deposits rates have also significantly dropped.
Average interest rates on 12-month euro-denominated loans which account for around 60 percent of total lending, dropped to a record low of 6.23 percent in November 2014, down from 6.93 last October and 7.17 percent in Nov. 2013.
Interest rates on Euro-denominated deposits slightly rose to 0.61 percent in November 2014, down from a historic low of 0.57 percent in Sept. 2014 and 1.62 percent in Nov. 2013.
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.
In a bid to give a new stimulus to consumption and private investments by promoting lending through lower interest rates, the country’s central bank made a new cut to the key interest rate in late Nov. 2014, taking it to a historic low of 2.25 percent. The new cut is also expected to have a positive impact on private investments by further discouraging investments in deposits whose interest rates have already dropped below the average inflation rate.
Yields on 12-month T-bills registered another surprise increase in this week’s auction after the key interest rate was cut to a new historic low of 2.25 percent late last November. Yields on 12-month T-bills in the latest Bank of Albania auction slightly rose to 3.51 percent, up from 3.45 percent in the previous auction and a historic low of 3.18 percent in early September 2014, continuing their upward trend.
Yields on 12-month T-bills have more than halved during the past one and a half years, dropping from 6.6 percent in early 2013 to 3.83 percent in January 2014 and 3.24 percent in the latest auction.
