In a longer-term horizon, under diminishing external impulses to the aggregate demand and a more contained fiscal behaviour, growth rates acceleration will be conditioned by the resurgence of the private sector. In this regard, the Bank of Albania deems that the economic climate provides the conditions and space for even higher consumption and private investment growth. Despite positive growth rates, the Albanian economy is expected to remain and operate below its potential, with the demand conditioning the continuation of the negative output gap and contained inflationary pressures. On the other hand, inflation performance will continue to be under foreign prices pressure for the upcoming period as well. In the absence of unexpected developments, the effect of shock from foreign prices is expected to fade away while the effect of administered prices increase is expected to be neutralised during the third quarter of the year. Therefore, inflation is foreseen to return within the Bank of Albania target band by the year-end. Although risks about this base scenario are added as a consequence of uncertainties of the global economy, they remain balanced. *** Drawing on the information above, the Supervisory Council of the Bank of Albania deemed that inflationary pressures are, in the short term, high, but with a downward trajectory; in the medium term they remain controlled. In the absence of unexpected shocks, inflation is expected to be within the target band of the Bank of Albania along the time horizon of monetary policy action.

Inflation’s performance over the recent months was consequent to the balance of two main factors’ opposite actions. On the upward trend, high primary commodity and raw materials prices in world markets were transmitted to the domestic inflation in the form of higher imported inflation. In the short run, this phenomenon also contributed to core inflation, which was up compared with last year. High net inflation rate of non-tradable goods showed that a part of higher commodity prices materialised in second round effects in inflation. Latest developments in inflation affected also the economic agents’ inflation expectation, which, however, remain within the target band of the Bank of Albania. On the downward trend, domestic economy developments continued to provide an environment with contained inflationary pressures. Our assessments on economic activity suggest positive growth rates for the first quarter, although below the potential. Under these circumstances, the Albanian economy continued to be characterised by spare productivity capacities – labour and capital – and negative output gap, continuing to exercise downward pressures on inflation. Similarly, the monetary development analysis confirmed the presence of contained monetary pressures on the domestic economy. Following, I would like to address the economic factors that determined inflation developments and their expected performance. Albania’s economic activity, during the first months of the year, took place in the context of a growing global economy, amid increasing inflation pressures and added uncertainty in financial markets. Global economic activity continued to grow during the first half of 2011, led by rapid expansion of demand in emerging economies.