Consumption and private sector investments were weak, whereas foreign demand continued to slow down, given the economic situation in our trading partner countries. The private agents’ uncertainty about the future was reflected in low propensity to spend and weak credit demand. This uncertainty prevented the transmission of the monetary stimulus to the economy. Moreover, banking system conservative policies maintained the lending standards tight, and prevented the normal functioning of the monetary policy transmission mechanism. Against this backdrop, economic and financial stability of the country was preserved. Private agents’ expectations on inflation were anchored around Bank of Albania’s target, showing a good perception of monetary policy signals, and effective communication of the Bank of Albania. The banking system remains sound and well capitalised with ample liquidity to ensure the return of financial intermediation to adequate levels, in spite of credit qualityrelated problems. Average annual inflation continued the decelerating trend in the third quarter, settling at 1.5%. The profile of inflation was determined almost entirely by the contribution of inflation from prices of agricultural products. Beyond the seasonal effect related to satisfying demand with domestic agricultural produce, these prices fell thanks to the drop in import prices for processed foodstuff in the countries of origin. Prices of other consumer goods categories provided low contribution to headline inflation, hence offsetting each other. Low inflation rates, especially in the long-term component, point to the presence of the negative output gap.

The performance of revenues and expenditure led to the budget deficit amounting about 1.25 times higher than a year earlier, most of which was funded through domestic long-term instruments. Budget deficit dynamics was reflected in further expansion of public debt. Data from the external sector of the economy show that foreign demand, net, was weak in the second quarter. Real exports, net, narrowed by 1.5% during this period, contributing negatively to aggregate demand. Their performance was determined simultaneously by increase in imports and deceleration of exports, in real terms. Foreign trade data for goods, for July-August, reveal that trade deficit narrowed 15.1% in annual nominal terms, during this period. Exports surged 15.8% during this period in annual terms, whereas imports dropped 3.0%. Financial markets continue to reflect low risk and inflation premia. In the interbank market, trading volume increased and interest rates fell, showing lower volatility. In the primary market, yields fell further, especially on securities with longer term to maturity. The yields curve moved downward and its slope was reduced. Interest rates continued to fall in the deposits market, while, in August, interest rates on credits fell as well. In spite of this, credit performance was weak during these months. Following the persisting deceleration over the first half of the year, private sector credit contracted in July and August. As at end-August, it stood 2.0% lower than a year earlier. Credit performance reflected the weak credit demand from both businesses and households, as well as the tight standards of the credit supply.