The new cut is the third consecutive intervention of the central bank through its monetary policy during this year, but the transmission mechanism has failed to reduce interest rates on lek-denominated loans and has been reflected only on only lower T-bill yields and interest rates on lek-denominated deposits
TIRANA, Nov. 27 – With economy slowing down and prospects remaining grim, Albania’s central bank has made a new cut to the key interest rate, hopeful that the easier monetary policy will help boost domestic consumption and revive lending which has plunged into negative growth rates.
The Bank of Albania announced this week it has lowered the key interest rate by 0.25 percent to a historic low of 3.25 percent as inflation rate remains far below the 3 percent target band. The new cut is the third consecutive intervention of the central bank through its monetary policy during this year, but the transmission mechanism has failed to reduce interest rates on lek-denominated loans and has been reflected on only lower T-bill yields and interest rates on lek-denominated deposits. Speaking in a press conference on Wednesday, central bank governor Ardian Fullani said low inflation pressures in the past few months reflected sluggish demand and production as a result of the country’s poor economic growth.
The governor warned Albania’s economic prospects remain grim even for 2014.
The Albanian economy grew by only 1.35 percent in the first half of this electoral year and is expected to grow at around the same levels of 2012 when at 1.6 percent, Albania registered its lowest annual GDP growth rate since the collapse of the notorious pyramid schemes in 1997, and almost half of the average growth rate during the global crisis year from 2009 to 2011.
“The reduction of the key interest rate is expected to be accompanied by lower loan interest rates. Considering the expected fiscal developments for next year, the action aims at preserving the macroeconomic stimulus and create the necessary conditions to fulfill the inflation target. The central bank’s Supervisory Council estimates that expected economic and financial developments in Albania and abroad will require the preservation of the stimulating nature of the monetary policy in the upcoming period. The Bank of Albania remains committed to react through the monetary policy in time,” said Fullani.
The central bank says the continued ease of the monetary policy has not been reflected on consumption and investments because of hesitation by both consumers and businesses in taking long-term consumption and investment decisions.
“High loan risk premiums and the slow reaction by households and businesses have curbed the transmission of the monetary stimulus to the economy. The economic growth is expected to remain low and not generate inflationary pressures,” said governor Fullani.
Failure of monetary policy
Since September 2011, the Bank of Albania has cut the key interest rate by 2 percent to 3.25 percent in several consecutive interventions, but the moves have only been reflected on lower T-bill yields and interest rates for lek-denominated deposits. Meanwhile, average interest rates on lek-denominated loans have remained almost unchanged during the past two years, reflecting the failure of the consecutive cuts to the key interest rates in the past two years.
Lending continued remaining at negative growth rates even in September 2013, while the deposit growth rate slowed down to 2.7 percent, unveiling the critical situation both households and businesses are facing as bad loans have reached a record 25 percent, and domestic consumption and private investments remain sluggish. Apart from poor demand for new loans, tight lending standards applied by banks and high interest rates have also influenced on lending which registered negative growth rates for the third month in a row, in a situation which is unprecedented in the past 15 years. High interest rates remain a barrier to overcome the critical situation with lending, and easier monetary policy followed by the central bank has failed to produce lower interest rates for national currency-denominated loans.
Latest Bank of Albania data show average interest rates on lek-denominated loans rose to 10.14 percent in September 2013, up from 9.48 percent last August and 11.1 percent in September 2012. Interest rates on lek-denominated loans in September 2011 stood at 11.07 percent.
The Bank of Albania says the failure of the monetary policy to lower loan interest rates is a result of low demand for new loans and specific problems of certain sectors of the economy as well as tighter lending standards imposed by parent Eurozone-based banking groups.
In September 2013, interest rates on 12-month lek-denominated deposits dropped to 3.41 percent, down from 3.83 percent in August 2013 and 5.19 percent in August 2012. Back in September 2011, when the key interest rate was cut by 0.25 percent to 5 percent, interest rates on 12-month lek-denominated deposits stood at 5.92 percent, and have been on a downward trend since then.
Foreign, mostly euro-denominated loans stood at 61 percent of total credit outstanding in July 2013, down from 64 percent a year earlier, while the share of foreign currency-denominated deposits in the total deposit stock fell from 49 percent to 47 percent in the same period. “Such high euroisation inhibits monetary policy’s effectiveness and could expose banks to currency mismatches or indirect credit risks; it is therefore a potential source of instability in the financial system,” says the European Commission in its latest progress report on Albania.
