The central bank announced after a meeting of its Supervisory Council it has cut the key interest rate by another 0.25 percent to 4.5 percent, the lowest historical rate
TIRANA, Jan. 25 – Failure to lower interest rates for lending in the national currency even after two separate key interest cuts in the past three months and repeated calls by business associations forced the Bank of Albania this week to make another intervention to stimulate the economy which is suffering from low consumption and investments as the Eurozone crisis impacts deepen.
The central bank announced on Wednesday after a meeting of its Supervisory Council it has cut the key interest rate by another 0.25 percent to 4.5 percent, the lowest historical rate. The move comes as inflation rate during the second half of 2011 registered 2.9 percent, down 1.1 percent compared to the first half of 2011, remaining within the BoA 3ѱtarget band. The decision is also in line with the European Central Bank which has lowered the key interest to 1 percent, the lowest historical level. For 2012, Albania’s central bank expects to continue stimulating the economy with cuts in the key interest rate based on inflation pressure developments in an effort to boost lending, and reinvigorate domestic consumption as the only hope for industries to survive the crisis impacts at a time when international financial institutions expect a harsher year for Albanians.
During the first half of 2011 inflation was at an average of 4.05 exceeding the central bank’s target by 0.05 percent, a situation which forced the Bank of Albania to raise the key interest rate to 5.25 percent in order to reduce inflation pressures.
Differently from what was expected, the first Bank of Albania move to lower the key interest rate for the national currency lek by 0.25 percent to 5 percent failed to produce lower interest rates for credit in Lek as bad loans stand at a record 18 percent and lending standards remain tight. Official Bank of Albania data show average interest rates for 6 to 12 lek-denominated deposits rose from 11.38 percent in Sept. 2011 to 11.94 at the end of Nov. 2011 when the central bank lowered the key rate by another 0.25 percent to 4.75, the lowest ever historical level. Interest rate for 1 to 3-year lek loans also rose 13.86 in Sept. 2011 percent to 14.17 percent in Nov. 2011.
Meanwhile, average interest rates for 12-month lek-denominated deposits fell under the expected trend from 5.92 percent in September 2011 to 5.85 percent at the end of Nov. 2011 when another 0.25 percent cut was approved. December 2011 data not available yet will prove if the Bank of Albania interventions to lower the key interest rate by 0.5 percent in two separate moves in Sept and Nov. 2011 has been efficiently transmitted into the Albanian banking system which has been suffering moderate credit growth rates after the 2008 global crisis.
Meanwhile, interest rate for loans in Euro which account for 60 percent of total lending in Albania, dropped from 8.24 percent in Sept. 2011 to 7 percent in Nov. 2011 as the European Central Bank lowered the key interest rate to 1.25 percent in Nov. 2011. The drop is expected to continue as the key ECB rate was lowered by another 0.25 to 1 percent last December.
Eurozone crisis threat/benefits
Speaking at a press conference, central bank governor Ardian Fullani admitted the global crisis had increased economic insecurity in the Albanian economy negatively affecting consumption and domestic investments.
“The poor performance of consumer spending and the presence of non-utilized capacities in the economy has curbed businesses’ demand to make new investments,” said the governor.
The central bank says Albania’s economic performance in 2012 will depend on Eurozone crisis developments and especially growth in Italy and Greece, the country’s key trade partners, as well foreign investors’ stance toward risk. The public debt at around 60 percent of the GDP, the slowdown in economic growth in 2011 and its further deterioration in 2012 as the Eurozone stands on the brink of recession are the key risks for the Albanian economy to attract more foreign direct investment, and could especially harm the privatization process this year.
However, the central bank suggests that under an overoptimistic scenario Albania could benefit from the Eurozone crisis due to “low labour cost, macroeconomic stability, and the financial health of businesses, households and the banking system which could translate into higher foreign direct investment.”
The Bank of Albania also expects a lower economic growth than government for 2012, which will most likely be the same to that of 2011, especially to that of the first quarter of 2011 when the country’s economy grew by 3.4 percent year-on-year. Government expects 2012 growth to be at 4.3 percent, 0.4 percent more than in 2011, which is 2 to 3 times higher compared to what international financial institutions expect.
