ardian fullani : recent economic and monetary developments in albania speech by mr ardian fullani, governor of the bank of albania, at the press conference on the monetary policy decision of the bank of albania supervisory council, tirana, 31 august 2011. * * * today, on 31 august 2011, the supervisory council of the bank of albania reviewed and approved the monthly monetary policy report. based on the analysis of albania ’ s latest economic and financial developments and following discussions on their performance outlook, the supervisory council of the bank of albania decided to leave the key interest rate unchanged at 5. 25 %. the supervisory council holds that the actual monetary conditions are appropriate for meeting the inflation target and for continuing to stimulate the economic activity. let me now proceed with an overview of actual and expected economic developments and main issues discussed at today ’ s meeting of the supervisory council. annual inflation in july was 3. 6 %, following the downward trend noted in the second quarter of the year. consumer price performance continues to be under the pressure of rising prices in global markets, although lower than in previous months. annual inflation was primarily formed by the contribution of processed food prices, most of which are imported. decline of the annual inflation rate reflects the downward contribution of unprocessed foods as a result of increased supply of domestic agricultural products, a seasonal development, which in july 2011 appeared to be stronger than a year earlier. on the other hand, regulatedprice goods and non - food goods had a low and downward contribution to this month ’ s inflation. in line with bank of albania ’ s expectation, controlled inflationary pressures by the domestic economy, as well as anchored inflation expectations created a favourable environment for a rapid reduction of imported inflation effects. consumer prices during 2011 were mainly affected by supply shocks, materialised in higher prices of imported goods and some products subject to excise, or with regulated prices. these effects appeared to be more moderate in july ; in the absence of sudden shocks, they are expected to decrease further in the months ahead. below - potential economic growth continued to generate controlled inflationary pressures on the demand side. hence, core inflation stopped increasing and is set around the bank of albania ’ s target of 3 %. moreover, stabilisation of inflation expectations of economic agents and the prudent policy of the bank of albania regarding their anchoring are reflected in moderated second - round effects on inflation. ( following, i will describe in more detail economic highlights defining the inflation performance and their expected

signs during the last months. in the meantime, the world inflation rates have been falling, owing to low raw materials prices and low use of productive capacities, in the presence of a low aggregate demand and increasing unemployment. the economic activity downturn worldwide was associated with contraction of world trade, tightening of financial conditions and dropping of economic agents ’ confidence the direct impact on emerging countries, such as albania, is the fall of demand for their exports, decline of foreign direct investments and tightening of lending terms in world markets. thereupon these countries have been increasingly affected by the crisis. according to imf, the emerging countries of eastern europe are estimated to incur a contraction of about 5 percent during this year. the albanian economy, in the face of this unfavourable environment, has recorded a comparatively positive performance. there are few data on the real economy. the bank of albania estimates that a positive economic growth has characterised the first half of year. on the others hand, low growth of credit and money supply, deteriorated business and consumer confidence indicators, slow - down of budget revenues and specific indicators of certain economy sectors, suggest that the economic growth rate has decelerated. it is still early to draw conclusions on the economic performance over the course of 2009 and onward. the bank of albania deems that the premises to keep positive economic growth rates in the country are present, among which the macroeconomic and financial stability of the country is of primary importance. economic activity at home is carried out under the presence of favourable consumer price stability. it is sustained by a soothing tendency of monetary conditions and by an expansionist fiscal policy over this period. the bank of albania cut the base interest rate in january and undertook liquidity - injecting operations, raising its quantity in the market. simultaneously, we have prolonged the maturity span of injecting operations to smooth down the upward slope of interest rate curve and we have expanded the base of eligible collateral to facilitate the access of financial institution in liquid funds. these operations of the bank of albania have helped control on interest rate level. bank of albania ’ s intervention has been more effective in controlling the short - term interest rates. the long - term interest rates of government securities and loans revealed rising tendencies, owing to the government ’ s demand for financing and the increased sensitiveness of the banking system towards liquidity indicators. in parallel, the depreciating exchange rate trends have complemented the easier monetary conditions framework, providing advantage to exports and trade deficit improvement.