pressures are characterised by short - term supply shocks, while the generated inflation by domestic demand is low, as reflected in the relatively stable situation of core inflation. this performance is conditioned by the existence of free capacities in the albanian economy as well as contained monetary expansion and anchored inflationary expectations of consumers, businesses and agents in the financial market. the bank of albania deems that, in general terms, these factors will continue to be present during 2011. on the other hand, the bank of albania, in its inflation outlook, has factored the projections on the situation of fuel and food items made so far by the imf and fao. in the absence of added and unpredictable supply shocks, or second round chain phenomena, inflation rate is expected to be in line with the bank of albania target. bis central bankers ’ speeches i would like to continue with a more detailed analysis of current and expected developments in the albanian economy and financial markets, also assessing their implications on the expected consumer price inflation. economic activity in the absence of direct data and based on a number of indirect indicators, the bank of albania assesses that the albanian economy continued to grow during the fourth quarter of 2010. the economic growth was supported mainly by the external demand for albanian exports. however, domestic demand has shown lately signs of recovery, as evidenced by the positive trend of bank lending, indirect consumption indicators and improved economic sentiment indicator of the albanian businesses and consumers. consumption and private investment, the two most important components of aggregate demand, experienced a slow progress during 2010. while disposable income of the albanian consumers is considered to have increased in real terms, high uncertainty and tightened lending terms and conditions by the banking system deterred the domestic consumption. on the other hand, the albanian businesses encountered insufficient demand for them to use their full capacities and higher financing costs. this situation has most affected sectors of the economy such as construction, which relies totally on domestic demand and, at a lower extent, other sectors such as industry, which generates most of its activity from external demand. under these circumstances, investments pace was relatively lower, compared with previous years. the bank of albania considers that domestic consumption and investments will have a better performance during the current year. conditions for funding the private sector demand appear improved, while risk premia in financial markets appear lower. uncertainty for the future should gradually decrease. additionally, the expected positive influence of external demand and fiscal policy during 2011, are expected to stimulate domestic demand. correction of fiscal conduct is followed by

and modest, monetary policy should mostly ‘ look through ’ it. by contrast, when the shock has a longer lasting effect on the economy and inflation, or there are a series of supply shocks in one direction, there are stronger grounds for monetary policy to respond. which brings us to the important role of inflation expectations. when households and businesses have a high level of confidence that the board will do what is needed to return inflation to target, we can afford to look through a greater share of negative supply shocks – even those that will last for a lengthy period. of course, there are limits here. the longer a central bank permits inflation to remain outside target, the more likely it is that inflation expectations will shift. and if they do, it will require even higher interest rates and unemployment to bring inflation back to target. given these considerations, the board ’ s approach – when faced with a need to balance its objectives – is to explain how these are being managed and why. over the past year, this has been done through the analogy of aiming to tread a ‘ narrow path ’ in which inflation returns to target within a reasonable timeframe while employment continues to grow. as we have been saying for some time, it might have been possible to get inflation back to target sooner by raising the cash rate more sharply. however, doing so would have caused greater hardship for households and businesses and ultimately higher unemployment. as such, the board judged that, at that time, the costs outweighed the gains from restoring inflation to target quicker. at the same time, the board has been clear that it has a low tolerance for allowing inflation to return to target more slowly than currently expected. accepting this would risk eroding public credibility in our commitment to low and stable inflation. and as i have discussed, the long - term costs to the economy if that were to happen would be considerable. financial stability and the dual mandate a second potential trade - off in monetary policy frameworks is between financial stability and the inflation and full employment objectives. my main observation here is, again, that these objectives are often more complementary than assumed. r e s e r v e b a n k o f au s t r a l i a the rba has long had a mandate to contribute to financial stability. over the past quarter century, this has included working closely with the australian prudential regulation authority ( apra ) and other members of the council of financial regulators to promote stability in the financial system. it is pleasing