money system is a closed loop, which means that the central bank, as the monopoly provider of new base money, is the only institution that can change the total supply in the system. this is the basis for monetary policy, because it confers the power to set the price of bank reserves. 13 when a central bank conducts a qe operation, or any other kind of asset purchase, it pays in base money, which it deposits into the central bank account of the seller, be it government or a commercial bank. this changes the total supply of bank reserves in the system. the change in supply, in turn, affects the price. the crucial implication is that unsterilised asset purchases are, in the words of two economists, ‘ tantamount to 13 on this point, and for a broader review of how different parts of the money supply are created, see ‘ money creation in the modern economy ’, especially pp. 21 - 25, in the bank of england quarterly bulletin q1 of 2014, available at https : / / www. bankofengland. co. uk / - / media / boe / files / quarterlybulletin / 2014 / money - creation - in - the - modern - economy. page 8 of 16 an easing of interest rate policy ’ 14. as i ’ ll explain in more detail later, this is the main reason such policies can be inflationary. during this crisis, we at the sarb have already expanded the supply of central bank money, and although we have seen some deviation of short - term rates from the repo target, these have not been too large or persistent. in practice, we have a deposit rate set at 200 basis points below repo, which functions as a floor for the system – it is essentially a sterilisation instrument. 15 as predicted by theory, we have therefore seen actual short - term rates fluctuate between the repo rate and this deposit rate, although they have mostly stayed close to the repo rate. of course, our interventions have not been going on too long, and this has been a period of severe stress in financial markets. were we to implement a large, long - term increase in bank reserves, as would be required for a big qe programme, we would need to sterilise more aggressively to keep the actual overnight rate close to the repo target. to do this, we could use various techniques. for instance, we could issue sarb debentures to so

ardian fullani : albania ’ s economic and financial developments in 2011 speech by mr ardian fullani, governor of the bank of albania, at the presentation of the bank of albania ’ s annual report 2011 to the parliamentary committee on economy and finance, tirana, 30 april 2012. * * * honourable chair, distinguished members of the committee, ladies and gentlemen, * * * before starting my speech, i would appreciate your kind understanding about the fact that the period after the submission of the report has enriched the 2011 ’ s economic data inventory with new information. it is understandable why this information is not incorporated into the submitted material. in the following, i will address overall economic developments based on the latest information, trying to also identify the differences between the latest data and the version available to you. * * * our annual meeting on introducing bank of albania ’ s annual report remains a special pleasure for me. more than a legal obligation, the bank of albania considers this report as an important step to enhance institutional transparency, foster accountability and intensify the dialogue with all economic policy - makers and stakeholders. let me now start with an overview of main conclusions of the report. the economic activity recorded positive growth rates, while the macroeconomic balances remained stable or were further strengthened. it should be emphasized that this activity was conducted against the backdrop of deteriorating global economic and financial situation in 2011. instat ’ s data reveal that albania ’ s economy grew 3. 1 % in 2011, supported mainly by the increased external demand for goods and services, whilst the domestic demand performed sluggishly. the economic growth was materialised into a better performance of services sector and individual branches of industry, while construction continues to suffer from sluggish demand and high inventory, especially of residential buildings. these developments reflect the internal restructuring of the economy and albanian business, in response to changed aggregate demand composition and the need for enhancing the economic competitiveness in the region and world - wide. consumer price inflation appeared volatile in 2011, due to upward prices in international markets and other supply - side shocks. however, the past year ’ s average annual inflation was 3. 5 %, i. e., in line with bank of albania ’ s target. the meeting of inflation target was driven by low inflationary pressures from the domestic economy, controlled monetary expansion and anchored inflationary expectations. meeting inflation target amidst a challenging environment, full of unexpected developments, reflects the effectiveness and credibility of bank of albania ’ s monetary policy. our