Albania's Central Bank cut interest rates to 5 percent from 5.25 percent, the lowest level of the last decade, after the government cut spending to bring down the budget deficit, the bank said on Wednesday.

Central Bank governor Ardian Fullani said the bank viewed as "a step in the right direction the downward review of the budget deficit and the public expenditure plan" passed by parliament.

Battling with lower revenue and remittances, Albania cut spending in the budget by 39 billion leks ($360 million) and revenue by 27.2 billion leks to halve its budget deficit to 3.1 percent of GDP by the end of this year, from 7 percent in 2009.

"Guaranteeing fiscal stability, lowering premium risks associated with it, strengthening the public trust and a bigger access for the private sector in the financial markets were some of the elements that helped the easing of the Central Bank's monetary policy", Fullani told a news conference.

"These avoided a possible sterilisation of our actions related to the interest rate," Fullani added.

Fullani had said two weeks ago the bank would step in with monetary stimulus once the proposed budget cuts -- now passed -- became effective because they were "necessary, indispensable and in line with the recommendations" of the bank and the IMF.

Annual inflation in June was 3.2 percent, in line with the central bank's target of 3 percent, allowing for 1 percent below or above that target, at end-2010.

"Inflation pressures have come down while the foreign balances of the economy have been improved, Fullani said.

"The Bank of Albania hopes the banking system would convey (the interest rate cut) to the economy at the right time and intensity," added Fullani.

Banks have been slow in reflecting the cuts in their lending rates in Albanian leks, which accounts for 32 percent of overall lending.

Some 65 percent of lending is in foreign currency, mainly euros. But lending in leks has been growing more than in euros since the bank last cut the rate at end-October last year.

Tight lending terms by banks, Fullani said, were to blame for lower private investments in the first half of the year.

Fullani said he believed foreign currency lending should be channeled at a lower cost, arguing that foreign currency deposits had grown and there were lower premium risks.

Foreign currencies account for 45 percent of all deposits.

The Albanian economy, seen in the context of world and regional developments, was doing well, Fullani said. GDP grew 2 percent in annual terms in the first quarter of 2010.

"However, the Albanian economy still suffers from low internal demand and problems with the financing of business," Fullani said. Source; Reuters: Balkans.com