Albanian daily news
Inflation is stable and widespread in the economy, prompting the Bank of Albania to raise the base interest rate again by 0.5 percentage point. This decision is expected to lead to a further increase in yields and borrowing costs in the domestic financial market. Meanwhile, the belief is maturing among pundits that interest rate hikes by central banks are towards the end of the most aggressive phase and perhaps next year it will take a slower pace.
The Bank of Albania raised the base interest rate last week for the fifth time this year. For the third consecutive time, the base interest rate has increased by 0.5 percentage point and has already reached 2.75%, its highest level since the end of 2013.
Some analysts believed that the Bank of Albania could somewhat slow the pace of monetary normalization and reduce growth by 0.5 percentage point between November and December.
However, the Supervisory Board’s recent decision reflects the Bank of Albania’s growing concern about the nature of inflation. The highest inflation in 24 years is no longer only read as a supply shock, but as a phenomenon that has been widely tracked in production costs and has been largely reflected in all products and services produced in the Albanian economy.
“Rising prices have started to be present in most of the basket, including items where most of the value added is created in the country.
This trend suggests the simultaneous increase in the base and the intensity of inflationary pressures. The increase in internal inflationary pressures reflects the action of three factors.
Firstly, the good cyclical position of the Albanian economy, which has its origins in the stability of the demand for goods and services and implies a strong use of national production capacities, has been accompanied by a rapid increase in wages.
Second, the high prices of raw materials, oil and energy, lead to further increases in national production costs. Third, the increase in expected inflation affects the increase in futures prices,” the Supervisory Board’s latest statement said.
The main indicator that proves the sustainability of inflationary pressures is core inflation, which excludes products that by nature have high price volatility, mainly food and energy products.
In September, this indicator reached 8.44%, the highest level ever recorded by the Bank of Albania.
Core inflation is a particularly important indicator in monetary policy decision-making because it tends to strip headline inflation of the effects of supply shocks or other factors with a short-term impact. It represents the most stable part of inflation, which is influenced by demand factors and, therefore, monetary policy.
Costs for borrowers are still rising
While historically there have been concerns about the functioning of the monetary policy transmission mechanism in Albania, this time around it seems that its movements are rapidly transmitting to the financial market.
The segment most sensitive to movements in base rates, the primary market for public debt instruments, is now evolving at an even faster pace. Earlier this month, the weighted average yield on 12-month bonds reached 5.74%, marking a new nine-year high.
High inflation and central bank signals have created high expectations for further interest rate hikes. It is also for this reason that yields on short-term instruments increase at rates faster than the base interest rate.
While over the March-October period the base interest rate increased by 1.75 percentage points, the weighted average yield on 12-month bonds more than doubled, by 3.95 percentage points percentage.
After the last rate hike on Nov. 2, the market is likely to react with a further rise in yields. Faced with high inflation, which has already exceeded the level of 8%, investors are trying to reduce the negative gap in real interest rates from which they benefit to finance the Albanian government’s debt.
Rising yields increase Albanian government spending on debt interest.
According to data from the Ministry of Finance, for the first nine months of the year, the budget spent 21.1 billion lek on domestic debt interest, which is 7% more compared to the 9-month period of Last year. Growth is also expected to continue next year. The 2023 budget interest expense is expected to be ALL 60.9 billion, up 20% from 2022.
The consequences of rising yields are becoming increasingly tangible even for private borrowers, who have variable-rate lek loans, which are typically constructed on the basis of the yield on 12-month bonds plus a fixed margin.
Over the course of a year, the 12-month bond yield has increased by around 4.1 percentage points, an increase that will automatically be passed on to borrowers, who benefit from the periodic revaluation of the loan installment in Lek in November. .
This means an increase of around 45% in the monthly installment of a typical home purchase loan taken out in Lek currency. The increase in borrowing interest charges will deal an additional blow to family budgets, already affected by the highest inflation in 24 years.
The increase in interest rates is starting to be reflected in the price of new loans in Lek. Data from the Bank of Albania shows that in September the average interest rate for new loans to Lek reached 7.07%, the highest level since February 2018.
Currently, the average interest rate for new lek loans has increased by 1.18 percentage points compared to a year ago and by 1.6 percentage points compared to March this year, when the Bank of Albania has started monetary normalization.
Growth has started to stabilize, especially after July, and the average interest rate on new loans is rising for the third month in a row.
Meanwhile, the average deposit interest rate in Lek hit the highest level in at least seven years in September. According to data from the Bank of Albania, the average interest rate for all term deposits in September jumped to 1.45%, rising for the third month in a row.
Compared to March, when the Bank of Albania started the cycle of increasing the base rate, the average interest on time deposits in Lek increased by 0.75 percentage points, or 107%, writes among others the “Monitor”.