The Bank of Albania on Wednesday lowered the base interest rate for the second time this year, bringing it to 2.75%. The base rate has already been cut to the level it was between November 2022 and March 2023, when the base rate hike cycle was still ongoing and had not peaked.

The further reduction of the basic interest rate is likely to affect a further decrease in borrowing costs in Lek for businesses and households.

Usually, the reduction of the base rate is first reflected in the yields of the Albanian government's treasury bonds. Treasury bills and especially 12-month bills are used as benchmarks for loans with variable interest rates.

The reduction of the base rate and yields is thus automatically reflected in the interest of existing loans, in addition to the interest that banks offer for new loans.

In addition, this year 12-month bond yields have reached the lowest historical margins above the base interest rate. Even, in the last auction of October, the yield of 12-month bonds was equaled for the first time with the basic interest rate.

The weighted average yield reached 3% in October, the lowest since July 2022.

Such a situation, when it seems that the base rate is being passed more than ever on the interest rates of loans, the chances are that these interest rates will continue to decrease. The reduction of interest rates is a factor that potentially makes borrowing more attractive and positively affects the lending performance of the economy.

New home loan interest rates in lek fell again in August, touching the lowest level since 2022.

According to statistics from the Bank of Albania, the average interest rate of new loans for the purchase of housing by individuals in Lek decreased to 3.66%, the lowest level for this year and at the same time the lowest value recorded since February 2022.

The average interest rate of the entire loan portfolio, including balance amounts, remained at the level of 4.56%, the same as in July and at the same time at the lowest level since November 2022.

This year, lending is growing at the highest rate in the last 15 years. At the end of September, the loan portfolio was growing by 12.1% on an annual basis. For the 9th month of 2024, the banking sector has given a total of 280.7 billion new loans to the economy, an increase of 30% compared to the same period last year.

The Bank of Albania has expressed concern about the rapid growth of credit, especially in the real estate segment. In order to balance the effect of relatively low and falling interest rates, in the middle of this year the Bank of Albania decided for the first time a countercyclical addition on the capital adequacy ratio of the banking sector.

The central bank has warned of further increases if credit continues to grow at similar rates, trying to find the right balance between rapidly growing credit and inflation that is significantly below target.

On the other hand, the reduction in the base rate and the decline in yields theoretically creates premises for a decrease in deposit interest rates. After the first reduction in the base rate by the Bank of Albania, in July, interest rates on new deposits in lek have started to decline slightly. In August, the average interest on new deposits fell to 1.94%, declining for the third consecutive month. /Monitor