of 2014 ; this is upward compared to the rate recorded in the previous quarter. the annual rate of inflation was 2. 2 % in march, returning within the bank of albania ’ s target band. the performance of inflation during the first quarter of 2014 was largely determined by the prices of unprocessed foods. prices of other items in the basket of goods were generally stable, providing a minimal contribution to annual inflation. from the macroeconomic point of view, the simultaneous action of weak inflationary pressures by the domestic economy, downward imported inflation and anchored inflation expectations led to low inflation rates. the domestic economic and monetary environment has put downward pressures on prices. owing to the fragile aggregate demand, the negative output gap persisted, despite the growth recovery in the fourth quarter of 2013. pressures bis central bankers ’ speeches from the labour market were subdued because of the rise in unemployment rate during 2013 and the moderate rise in wages. these developments led to a low increase of production cost and controlled businesses ’ profit margins. the weak domestic demand narrowed the room for businesses to pass the increase in excise duty on the final prices. also, the imported inflation has been downward, reflecting the low inflation in our trading partners and the stability of the exchange rate. economic and financial agents show anchored inflation expectations, with no considerable deviation from either the objective of the bank of albania or the average historical behaviour. analysing the economic performance, instat data show that the gross domestic product increased by 1. 1 % during the fourth quarter of 2013, after a decrease by 2. 5 % in the third quarter of 2013. this increase was broadly determined by positive performance of domestic private demand, while the contribution of the public sector and net exports was negative. from the sectorial point of view, economic growth was generated by the positive performance of production, whereas services declined. aggregate demand continues to be negatively affected by the difficulties of our main trading partners, low confidence of albanian businesses and households, tightened financing conditions. however, the domestic private demand increased in the fourth quarter, after decreasing a quarter earlier. indirect indicators suggest that developments in private investments were positive in the fourth quarter, while final consumption by the population continued to be weak. as previously stated, the bank of albania maintains that developments in both components of the aggregate demand will dictate the economy ’ s performance in the short and medium term. in this regard, we deem that the expected improvement in financing conditions and balance sheets, due to the payment of fiscal arrea

, the bank of albania ’ s monetary policy decisions were accompanied by continued liquidity injections and public guidance on the monetary policy direction in the near future. our monetary policy has managed to control the inflation expectations of economic agents, keeping them anchored to our target. it has also mitigated the liquidity risk and inflation premia in financial markets, contributing to lowering interest rates in the interbank market, government debt securities market, deposit market and lek credit market. however, its transmission to higher lending activity remains incomplete. interest on lek - denominated loans factors in the relatively high risk premia. moreover, banks remain considerably conservative in terms of lending, by tightening the applied standards. this development reflects the financial terms in the euro area and the uncertainty perceived by financial agents in the domestic market. it is an impediment to the transmission mechanism and illustrates the need for reducing risk and improving the business climate in the economy. this commitment should be the scope of work for both public and private economic agents. along with the conservative policies, lending continues to be affected by lack of demand for funds by businesses and consumers. the poor credit performance, particularly as regards lending in foreign currency and credit to businesses was translated into an annual shrinkage of 2 % in the loan portfolio in february. looking ahead, our baseline projections suggest that, after a weak performance in 2013, the trajectory of the albanian economy will be upward in the medium - term horizon. economic growth is expected to be more balanced during 2014, driven by both the domestic and external demand. the improvement of confidence climate will enable the real sector to benefit from the monetary stimulus, hence stimulating consumption and investments at home. also, sustainable recovery of the world economy will sustain albanian exports, particularly during the second half of the year. economic growth will be supported by maintaining the current stimulating direction of economic policies, and will benefit from continuing structural reforms. this trajectory will bring the albanian economy close to its potential and will establish the conditions for complying with the inflation target in the medium term. in the short term, the cyclical weakness of aggregate demand is expected to keep the economy below its potential and will be accompanied with weak inflationary pressures. with 90 % probability of occurrence, four quarters ahead, inflation is expected to range between 0. 5 % – 3. 9 %. at the end of discussions, the supervisory council decided to keep the key interest rate unchanged, at 2. 75 %. taking into account the available information, our