The prospects for the future show that the Albanian economy is expected to operate below its potential even in the medium-term, putting downward pressures on inflation. As I highlighted earlier, in 2010, the Bank of Albania’s monetary policy was implemented in a macroeconomic environment with positive growth rates, contained inflationary pressures and anchored inflation expectations. This environment led to retaining the stimulating monetary policy stance that has been conducted since 2009. It triggered downward interest rates and completed even further the stimulating effects from the exchange rate depreciation. BIS central bankers’ speeches  3  Low interest rates favoured rise in domestic consumption and investments, whereas the depreciated exchange rate supported growth in Albanian exports. Reduction of the fiscal stimulus in 2010 H2 expanded the space for monetary policy conduct. In July 2010, the Bank of Albania lowered the key interest rate by 0.25 percentage points, to its historic low of 5.0%. Improvement of banking system liquidity condition and weak public sector demand for money supported the transmission of an easing policy to all segments of the financial markets in the last months of 2010. In parallel, the Bank of Albania supplied the financial market with the required liquidity to support financial intermediation. Aiming at adopting the most advanced models of central banking, and particularly, convergence with Euro-system practices, the Bank of Albania changed the form of its operational objective. Since June 2010, our liquidity management operations are oriented to targeting short-term interbank interest rates and minimizing their volatility.

Deposit to GDP ratio was 64.2% at end-year, higher than its level prior to deposits withdrawal. In addition, the profile of deposit time structure reflected a higher preference for saving, characterised by a shift to longer maturity-term deposits. Easing lending terms during 2010 H2, stimulating measures taken by the Bank of Albania, and decreasing uncertainty and risk premiums were followed by a gradual credit growth. Private sector loan portfolio expanded by 10% in 2010, principally influenced by foreign-currency credit growth. This performance reflects prudential bank policies on loan portfolio quality and economic agents’ moderate demand for loan. In general, lending continues to suffer from lack of demand and realistic, qualitative and valuable business plans for crediting. Restoration of confidence in the financial system, macroeconomic stabilisation, and regulatory and supervisory measures taken by the Bank of Albania led to stabilisation and improvement of banking system capitalisation, liquidity and profitability indicators. 2. Inflation and monetary policy  Annual consumer price inflation was on average 3.6% in 2010, remaining within the Bank of Albania’s targeted band. Inflationary pressures were more concentrated in 2010 H1, mostly triggered by a rise in some administered prices. Average annual inflation in 2010 H1 was 3.9%. In the following two quarters, relative stabilisation of the exchange rate and low inflationary pressures from the domestic demand contributed to the average inflation rate convergence around the Bank of Albania’s target. Negative output gap generated contained inflationary pressures throughout 2010, thus balancing the national currency depreciation effect and the international market price rise.