January 28, 2015 / 5:26 PM / 5 years ago

UPDATE 1-Albania central bank cuts rates to record low 2 percent

* Central bank cuts rate to record low of 2 pct

* Monetary policy relaxed over some quarters (Adds details, quotes)

By Benet Koleka

TIRANA, Jan 28 (Reuters) - Albania’s central bank cut its benchmark interest rate to 2 percent on Wednesday, a record low, and said it would keep borrowing costs low to support growth and inflation.

The central bank had cut rates three times last year, to 2.25 percent, most recently in November. The cut affects lending in the national lek currency, which accounts for about a third of total lending by Albanian banks.

“The transmission of this decision in the financial markets will create the right monetary conditions to back economic growth and return inflation to its target,” its supervisory board said in a statement after its monthly meeting.

“The Board believes that achieving the inflation target will require relaxed monetary conditions for several of the coming quarters.”

Albanian consumer price inflation was 0.7 percent year-on-year in December, far below the Central Bank’s target band of 2 to 4 percent. The government, the IMF and the World Bank all expect economic growth of around 2 percent in 2014.

Weak inflation, sluggish growth and high borrowing costs had demanded monetary easing over recent quarters, the bank said, noting that financing costs for commercial banks and rates of interest on loans in leks have now fallen to historic lows.

Lending to the private sector grew 3.8 percent at end-November on annual basis after rising 1.6 percent at the end of the third quarter. Lending in the Albanian currency also grew 9.3 percent in November, much more than in hard currency.

“However, the full transmission of monetary policy in the economy continues to suffer from the hesitation of businesses to commit to long-term investments and low appetite from banks to undertake risks,” the Board added.

Bad loans amount to a quarter of total lending in Albania.

The board said “conservative policies” imposed by foreign parent banks had also restricted lending. Most of Albania’s 16 banks are European-owned.

“Our analyses and forecasts suggest lending activity will mark a slow improvement in 2015,” it added.

The board said the economy had probably continued to grow in the fourth quarter of 2014 after a 3.3 percent expansion in June-September. (Reporting by Benet Koleka; Editing by Catherine Evans)

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