Ardian Fullani: Economic and monetary developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on the decision of the Supervisory Council of the Bank of Albania, Tirana, 25 November 2009. *  *  *  In its meeting of November 25, 2009, the Supervisory Council of the Bank of Albania analysed “The Monetary Policy Report for November 2009”. After becoming acquainted with the latest economic and financial developments at home, and following the discussions related to their expected performance in the future, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged, at 5.25 percent. The Supervisory Council assessed that this interest rate is in line with Bank of Albania’s goal to keep inflation close to the target over the medium run. *** Economic and monetary developments over the latest months are featured by low inflationary pressures. Annual consumer-price inflation for October recorded 2.3 percent, being almost in line with its performance over the last quarter. The steady and low inflation rate has been conditioned by moderate pressures from domestic economy, due to: •  Economic activity slowdown during this period;  •  Low exchange rate pass-through of exchange rate depreciation on Lek prices of import goods; and  •  Stabilized inflationary expectations. Easing of monetary conditions by the Bank of Albania, through key interest rate cut in October and continuation of liquidity injecting operations have provided appropriate impulses for promoting the economic activity in the future.

The presence of the Housing Finance Fund in the mortgage market and its state guarantee distorted the market and hindered policy rate increases from being reflected in mortgage rates. Moreover, the Central Bank was not able to sufficiently affect expectations in the market with its decisions and pronouncements. This significantly changed in early 2007 when the Bank began, like the Central Banks of Norway and Sweden for example, to publish a future policy rate path. That change greatly improved the communication and transparency of monetary policy and significantly strengthened the transmission mechanism as policy rate decisions were much more effectively reflected through the maturity spectrum. The Treasury has delivered surpluses over a number of years. They and the privatization proceeds from earlier years were used to retire debt, leaving the Treasury currently without debt in net terms. In fact, the Treasury earned net interest income in 2007. Its deposits in the Central Bank are currently equivalent to roughly 12% of GDP. Nevertheless, it is evident from developments over the last few years that fiscal policy was not sufficiently tight to aid monetary policy in containing inflation. Domestic demand has been slow in responding to tightened monetary policy. The higher policy rate meant that the Icelandic króna became an attractive investment vehicle for foreign investors. International issuance of Icelandic krónur bonds commenced in 2005 with relatively lively issue activity – albeit fluctuating – into the early part of this year. It followed a pattern very similar to that experienced by New Zealand.