Interbank market rates soon reflected the last key interest rate cut and the yields on government debt securities continued to drop. The falling interest rates were mostly reflected in the deposit market rather than in the credit market, signalling a more conservative bank approach to lending and a savings-oriented real sector. Monetary indicators have performed in line with the developments in the real economy and the monetary inflationary pressures remain low. Money supply decelerated its growth rates further in January to 4.9%. The slowing money supply has reflected the low business and household demand for borrowing, and the lower budget deficit financing from the banking system. The annual growth of lending to the economy continued to decelerate to record lows of 2.1% in January. The poor performance of lending is evidenced in all categories and currency denominations, both for businesses and households. *** The new available information does not alter our baseline projection for the performance of the economy over the current year; however, it evidences a shift in the balance of risks to the downside. The Albanian economy is expected to grow at low and below-potential rates, reflecting the slowing external demand, poor consumption and private investment and a positive fiscal stimulus based on the planned budget for this year. Against a background of a negative output gap and in the absence of global market and liquidity pressures on the Albanian economy, the inflationary pressures are expected to remain low.
The prices of those assets fell, and markets closed for a range of complex credit instruments. As I said two years ago, “risk premia have become unusually compressed and the expansion of money and credit may have encouraged investors to take on more risk than hitherto without demanding a higher return. It is questionable whether such behaviour can persist”. And, as we have seen, it hasn’t. The re-pricing of risk that is still continuing is not a process that we should try to reverse. Adjustment to this has been painful for banks in the major financial centres in two ways. First, with some asset markets closed, banks found funding more difficult. Some needed to finance loans they had made but had then expected to package up and sell. Others needed to finance off-balance sheet investment vehicles that were no longer able to fund themselves. At the outset of the crisis, banks were concerned to protect their liquidity position. But increasingly, attention has turned to a second, more fundamental concern. As a range of asset prices fell, banks began to report large losses. Uncertainty about the scale and location of losses led to concerns about the adequacy of bank capital and hence the ability of the banking system to finance continued economic expansion. At the end of last year, sentiment in financial markets worsened markedly. So in mid-December, central banks around the world announced a co-ordinated set of actions in money markets.