(In the absence of direct data, it continues to be based on indirect quantitative and qualitative indicators.) 2  BIS Review 170/2010  Available indicators suggest that the economy grew in the second quarter in response to the higher foreign demand. The performance of domestic demand attests to a more positive private consumption, higher private investment and a more positive contribution of the public sector, albeit more moderately than in the previous year. Except for a more pronounced waning of fiscal stimulus effect, these developments are considered to have persisted in the third quarter as well. Although private consumption indicators are often contradictory, the overall setting shows a better performance compared to the first quarter of 2010. The rise in average wage and employment, the increase in the import of consumer goods and the substantial improvement of the consumer confidence index reinforce and signal the resurgence of consumption in the second and third quarter of 2010. On the other hand, the further decline of remittances and the contraction of consumer loans, the drop in the retail trade index and the higher consumers’ propensity to save suggest that the growth rates of consumption remain below the expectations. Private investment recorded positive growth rates as evidenced by the increase of capacity utilization, higher import of capital goods and better performance of investment loans. The further increase of investment in economy is reciprocally related to banking system lending; but ultimately, it will depend on the performance of domestic and foreign demand for Albanian goods and services.

To this purpose, alongside the banking system, we are considering the required measures that may lead to the growth of lending in line with the cyclical and structural needs of the economy. Economic and monetary developments elaborated above yielded an environment of contained inflationary pressures. Average annual inflation marked 3.4% in the third quarter. Against a background of below-potential economic growth, and given the absence of monetary-related inflationary pressures, inflation was largely affected by the rise in administered prices. The contribution of the latter’s rise to headline inflation is 1 p.p. In the absence of second-round effects, the effect of the rise in administered prices is expected to be transitory, while the inflationary pressures arising from domestic demand remain well contained. On the other hand, the depreciation of the national currency has been declining, hence offsetting the rise of primary commodity prices in the world markets and the increase of inflation in Albania’s main trading partners. The absence of inflationary pressures in the medium run and the contained fiscal policy provided room for pursuing a stimulating monetary policy that sustains economic activity. In July, the Supervisory Council of the Bank of Albania cut the key interest rate by 0.25 p.p. bringing it to the historical low of 5.00%. In addition, the Bank of Albania continued to supply the banking system with the required liquidity in order to ensure the smooth operation of the money markets and to enhance financial intermediation in economy.