Today’s key interest rate cut aims at providing a further boost to consumption and private investments, creating premises for lower financing costs in the banking sector. Data on public sector performance refer to the first four months of the current year. Revenues increased 9.1%, in annual terms, while spending shrank 5.9%. This performance materialised in the budget deficit of about 73.1% lower than a year earlier. A similar dynamics, though less intensive, is expected to persist in the months ahead. Consistently,  BIS central bankers’ speeches  1  the Bank of Albania has been in favour and has endorsed the consolidation path of fiscal policy, deeming that such policy contributes to the reduction of risks in the economy. Developments in the external sector led to an annual expansion of the trade deficit by 8.7%, during the first quarter of 2014. Albanian exports grew 11.6%; yet, the trade deficit expansion was determined by a 10.1% annual increase in imports. A more detailed analysis of trade developments shows that trade deficit expansion was attributed almost entirely to the increase in electrical energy imports. Albanian exports’ growth, however, was driven by the gradual improvement of foreign demand and depreciation of the real exchange rate over the past years. A steady improvement in this area should be anchored in structural reforms supporting the increase in productivity, development of Albania’s comparative advantages and reduction of vulnerabilities in certain sectors of the economy.

The added volatility of inflation for these items, over the past months was in response to structural changes in the domestic market and the downward trend of inflation in regional markets. Prices of other items in the basket continued to give low contributions. In spite of the volatility, medium-term inflation trends remain clear. The overall economic and monetary environment is characterised by weak inflationary pressures, reflected, in turn, in low core inflation rates. The analysis of macroeconomic factors shows that aggregate demand remains weak, maintaining economic activity below its potential level. The unutilized productive capacity led to low increases in employment, wages and production costs. Supply-side inflationary pressures remain weak, owing to the downward inflation in our trading partners, low primary commodity prices and stable exchange rate. Inflation expectations remain subdued and close to Bank of Albania’s inflation target. Regarding economic activity, recent data corroborate our earlier assessments for positive growth rates in the first months of the current year. Aggregate demand increased due to the positive performance of domestic private demand, while the public sector’s contribution was negative. Foreign demand continued to grow, as reflected in export growth. Consumption and private investments increased in the first three months of 2014, though at lower pace than in the fourth quarter of 2013. Their performance remained sluggish, reflecting the uncertainties of economic agents and tight financing conditions. The recovery in these components of demand will be a determining factor for the country’s economic growth in 2014.