The Bank of Albania judges that in the period ahead, inflationary pressures along the time horizon of monetary policy stance will remain relatively high, but their intensity will decrease during the year. In the following, I will analyse in detail the factors determining inflation developments and related risks. During the first months of 2011, global economic activity continued to grow, although the signals coming from confidence indicators suggest that risks associated with these positive developments are in place. Global inflationary pressures have increased as a consequence of a higher demand and persistent supply-side shocks. In advanced economies, fiscal consolidation and public debt reduction remain the major concerns, whereas inflation pickup has decreased the space for monetary stimulus. In advanced economies, the positive global demand momentum has led to increased aggregate demand, while the upward inflationary pressures have made the central banks respond by tightening the monetary policy. In financial markets, the public balance health has determined the yield performance in several countries, while the political tensions have elevated the demand for safer instruments. The outlook remains highly uncertain, as a consequence of higher global prices, fiscal consolidation in some euro-area countries and less space for fiscal and monetary stimulus. Returning to Albanian economy, the latest data on 2011 Q1, obtained from business confidence surveys, the performance of external trade activity, and monetary and fiscal indicators, support the continued recovery of the domestic economic activity, primarily due to positive contribution of production sector. External demand and fiscal stimulus are factors of major influence on this growth.

In March, the annual broad money expansion was supported by increased private sector credit, which rebounded in line with its seasonal trend path. The upward contribution of private sector’s demand for money has offset the gradual decline in net foreign assets. Public sector’s demand for money has been upward, supportive to the government’s more active stance over the first quarter of the year. In annual terms, the private sector loan portfolio grew by 11.5% from 10.3% in February. Business loan remains the main contributor to expanding the private sector lending. In the meantime, in March, household loans also showed positive signs. Overall, financial markets performed positively during the first four months of 2011. The information transmitted from financial markets shows agents’ anchored inflation expectations. Key interest rate rise at end-March is passed-through to short-term money market interest rates, leading to a slight flattening of T-bill yield slope. In deposit market, interest rates continued to fall, reflecting also the correction of their high rates having been marked after 2008. The foreign exchange market has operated smoothly and the exchange rate has continued to depreciate at low annual paces. The Bank of Albania has supplied the interbank market with the necessary liquidity for their normal functioning. To sum up, the Bank of Albania judges that the relatively high inflationary pressures over the first quarter of the year generally resemble transitory shocks.