Based on the economic outlook, and aiming at further boosting the aggregate demand, the Bank of Albania cut the key interest rate by 0.25 percentage points to 2.75%, in the first  2  BIS central bankers’ speeches  quarter of the current year. This cut followed the previous monetary policy easing in the second half of 2013. To strengthen and better transmit the monetary stimulus, the Bank of Albania’s monetary policy decisions were accompanied by continued liquidity injections and public guidance on the monetary policy direction in the near future. Our monetary policy has managed to control the inflation expectations of economic agents, keeping them anchored to our target. It has also mitigated the liquidity risk and inflation premia in financial markets, contributing to lowering interest rates in the interbank market, government debt securities market, deposit market and lek credit market. However, its transmission to higher lending activity remains incomplete. Interest on lek-denominated loans factors in the relatively high risk premia. Moreover, banks remain considerably conservative in terms of lending, by tightening the applied standards. This development reflects the financial terms in the euro area and the uncertainty perceived by financial agents in the domestic market. It is an impediment to the transmission mechanism and illustrates the need for reducing risk and improving the business climate in the economy. This commitment should be the scope of work for both public and private economic agents. Along with the conservative policies, lending continues to be affected by lack of demand for funds by businesses and consumers.

From the financial point of view, the weak economic growth puts upward pressure on the budget deficit and public debt, and creates financial difficulties for businesses. These difficulties are reflected in higher non-performing loans in the economy, and negatively affect the banks’ willingness to lend. Such problems have been and continue to be present in the Albanian economy. However, new information signals that 2014 may be a turning point for the economic activity in Albania. The economic growth indices, businesses’ perception and financial markets performance improved faster than our expectations. Such a development, combined with the expected improvement in the world economic outlook, subdued uncertainties, improved business climate at home, implementation of stimulating macroeconomic policies, and acceleration of structural reforms, signals that the Albanian economy may gradually improve in the quarters ahead. The current risks to this scenario will remain present. In the following, I will dwell longer in describing the expected developments and related risks, while trying to highlight the policies that need to be implemented in order to avoid such risks. Annual inflation averaged 1.9% during the first quarter of 2014; this is upward compared to the rate recorded in the previous quarter. The annual rate of inflation was 2.2% in March, returning within the Bank of Albania’s target band. The performance of inflation during the first quarter of 2014 was largely determined by the prices of unprocessed foods. Prices of other items in the basket of goods were generally stable, providing a minimal contribution to annual inflation.