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

development. ) although in an unfavourable external environment characterised by added uncertainties in our trade partners, the albanian economy continued to grow during the second quarter of 2011. in the absence of direct data, the bank of albania deems that economic growth during this period is similar to the one recorded in the preceding quarter, thus remaining below albania ’ s potential growth rate. economic activity relied on the public sector and external demand, although more moderately than in the first quarter of the year. in the meantime, the private sector demand appears sluggish, also conditioning our projections for economic growth for the rest of the year. private investments continue to be slow, compared with their historical rates and the country ’ s needs for quantitative and qualitative production capacities. this bis central bankers ’ speeches the expected easing of funding terms during the second half of the year as well as the decline of perceived uncertainty by businesses and individuals are expected to be accompanied by the somewhat more positive performance of private consumption and investments in this period. stimulating nature of fiscal policy during the first half of the year is reflected in a positive contribution of public expenditures to economic growth. for the first seven months of the year, public spending increased by 5. 9 % in annual terms. moreover, performance of fiscal revenues was slow, reflected in their annual growth of 2. 3 % during this period. this behaviour of income and expenditures is materialised in a higher budget deficit than a year earlier. fiscal impulse to the economy was consistent throughout this period. it showed tendencies of moderation during the second quarter, which are expected to strengthen further during the rest of the year, in conformity with the revised budget of 2011. contribution of foreign demand to economic growth was lower during the second quarter of the year. trade deficit in the second quarter was 20 % higher compared to a year earlier. our exports shrank by about 2. 8 % year - on - year for this period, a reflection of reduced exporting of energy, which is a volatile component in exports. despite this development, the core basis of exports continues to maintain more sustainable growth rates. on the other hand, imports continued their annual growth, albeit at a lower rate compared to the first quarter of the year. aggregate demand performance triggered economic activity growth but was inadequate to fully utilise albania ’ s output capacities. developments in the labour market seem sluggish and do not have premises for emergence of stable inflationary pressures. signals from economic information are confirmed also by the monetary