Albania raises bank rate as deficit and loans grow

TIRANA – Albania’s central bank raised its key repo rate by 0.25 percentage points to 6.25 percent on Tuesday, citing inflationary pressures from booming loans, loose government spending and rising electricity costs. Governor Ardian Fullani told a news conference the hike was meant to preserve price stability in the face of growing loan-fueled consumer demand, and also pre-empt the effects of a 7.9 percent deficit in next year’s budget. «Raising the rate aims to better control pressures generated by internal demand, better accommodate the oscillation of supply, as well as channeling inflationary expectations toward our 3 percent target,» Fullani said. The bank has already hiked rates three times in the last 12 months for the same reasons. Year-on-year consumer price inflation was 4.2 percent in October, from 4.4 in September. Fullani added the bank’s supervisory board thought that «the dynamic of current and expected macroeconomic developments confirmed growing inflationary pressures,» and singled out the government’s fiscal policy. «The effects of the 2007 budget deficit will impact aggregate demand throughout 2008. The deficit in 2008 will be added to this impulse. Their combined effect constitutes considerable pressure,» Fullani said. Albania’s 2008 budget, the country’s biggest ever, was passed on Monday. The government said the record deficit was «exceptional,» going to finance large infrastructure projects. The International Monetary Fund had previously told Albania not to overextend itself past a 5 percent deficit. It warned that too big a debt burden on its ambitious infrastructure projects «could add to overheating pressures and fiscal risks.» Fullani added that the bank was worried about the expansion of the credit portfolio, which hit growth of over 50 percent year-on-year in October. «The rate of growth for business loans was 44 percent, while for individuals around 68 percent, reflecting the high demand for financing,» he said. Fullani also highlighted the risk coming from growing electricity costs. The Balkan country’s power network fell into disrepair in the 17 years since communism collapsed. Power cuts of up to 15 hours are common, forcing the KESH power utility to rely on imports to keep state companies and services running. Private citizens and firms rely on generators that use ever-pricier diesel oil.