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.

Third, to increase our prudence towards the financial system stability, we adopted new techniques for a more comprehensive systemic risk assessment, enriched stress test exercises with the “bottom up” approach and improved models for the indirect credit risk assessment. The twinning project concentrated most of its resources on supervision and financial stability. In addition to constant motivation for improving the regulatory framework, supervision activities and risk administration, this priority becomes even more necessary given added challenges related to specific developments over the past years. The Bank of Albania has undertaken a number of actions to face and overcome these challenges. For the fourth consecutive year, the Albanian economy has been under the influence of the global economic and financial crisis. Its latest stage, the sovereign debt crisis and its interrelation with the balance sheets of the financial system have placed us on the frontline. Our two main trading and financial partner countries, Greece and Italy, have been severely hit by the crisis. Against this unfavourable landscape, the Albanian economy has grown and has maintained its financial soundness. Private agents have an overall sound financial position, relatively low debt levels and positive savings rates. In contrast to other countries in the region, the Albanian financial system has continued to lend to the economy, although at slower pace and somewhat tighter terms. Building on an appropriate and flexible regulatory framework, this response has been determinant to encourage the restructuring of the economy and guide it towards profitable sectors.