The yield and forward curves observed in the market are the probability-weighted averages of these possible paths, aggregated across market participants. A perceived binding lower bound on monetary policy rates skews the predictive distribution upward, since it truncates the distribution of conceivable future short-term rates from below: as the overnight interest rate reaches the lower bound, interest rate paths that would have embodied expectations of a further cut at a higher level of the actual overnight rate are, by definition, eliminated from the set of conceivable outcomes; conversely, rates above the lower bound receive a higher relative weight and the expected value of interest rates is mechanically pushed up.3 While longer-term yields are likely to decline even as the central bank cuts the short-term rate towards its lower bound, the truncated asymmetric distribution of expected future short-term rates means that they decline by less than they would away from the lower bound. The resultant tightening bias, in turn, can be quite costly, since it tends to arise in situations of strong and persistent disinflationary pressures and in the wake of a previous sequence of sizeable rate cuts. A policy of negative interest rates mitigates this tightening bias. In particular, the observation that a central bank is prepared to take interest rates to levels below zero induces a re-evaluation of technical feasibility constraints. A salient feature of this re-evaluation is the disappearance of the qualifier “zero” in the economic debate on lower bound constraints.
However, the lek loan price has not fully reflected our monetary policy, indicating the presence of high risk premia and containing the monetary stimulus transmission to the economy. These risk premia are also reflected in other lending terms, unrelated to the loan price, and appear tighter as compared to their historical performance. *** Under the Bank of Albania's baseline scenario, the economy will improve slightly during the current year. Increase in exports and a better performance of consumption and investments will continue to support the aggregate demand. The monetary policy will support the domestic demand, by maintaining macroeconomic stability and ongoing injection of monetary stimulus in the economy. Also, payment of arrears will help improve the balance sheets of firms and the private sector, and is expected to improve business borrowing. Excluding the payment of arrears, the 2014 budget has projected a fiscal adjustment needed against the backdrop of a rapidly increased public debt. Reflecting the weak economic and monetary dynamics in the country, inflationary pressures are expected to be weak. After four quarters, inflation is expected to vary 0.7%–3.8%, with a 90% probability of occurrence. This will require maintaining a stimulating monetary policy even in the medium term. *** At the end of discussions, the Supervisory Council decided to keep the key interest rate unchanged, at 3.0%. Given the expected inflation developments, the Supervisory Council deems that the monetary policy will remain stimulating in the medium term.