activation of the demand for loans and the parallel easing of lending conditions as applied from the banking system. bank of albania deems that banking system should reveal more visionary in assessing potential sectors of economic growth and to take a more active role in encouraging the economic activity. annual inflation in february 2010 pointed to 4. 4 %, exceeding by 0. 4 percentage points the upper limit of the bank of albania target ’ s tolerance. the annual average inflation pointed to 2. 6 %. the recent developments of inflation have reflected the statistical impact of the comparison to a relatively low prices base in 2009, the more full transmission of exchange rate depreciation on consumer prices and the administrative increase of energy, since january 2010. the later factor provided an effect of about 0. 5 percentage points on inflation level, being the main reason of exceeding the level of 4 %. on the other side, the increasing tendency of food goods inflation is owed to the global conjuncture of goods prices, which is revealing a gradual monthly increase since the half of 2009. our analysis recommends that the increasing trend of inflation owes mainly to supplying factors, which are estimated to manifest an uneven nature and a short - term action in time. the bank of albania expected these developments, being factorised on our projections regarding inflation and communicated timely and in terms of transparency to the public. in medium term period, the growth under potential of the albanian economy owing to the slowdown of the domestic and external demand, shall establish an environment of low inflationary pressures, which are expected to balance the pressures deriving from the supply direction. this assessment is also supported by the sustained developments and at low historic rates of the long - term component of non - tradable goods inflation, as the most directed transmission of inflationary pressures generated from the internal demand in economy. the rates of both key inflation and of the non - tradable goods in february pointed to 1. 1 and 2. 3 %, respectively. throughout the discussions on the current and expected economic developments, the supervisory council of the bank of albania concluded that the inflationary pressures balance in medium term horizon is in line with the bank of albania inflation target, notwithstanding the latest tendencies of consumer prices ’ inflation. the assessments regarding the demand slowdown and the increase of negative production gap, the more controlled development of exchange rate and, the equilibrated expectations of economic agents about inflation, are factors which shall condition the development of inflation within the target of the bank of albania. at the conclusion

further and interest rates dropped, remaining close to the key rate and displaying low volatility. moderate government demand for funding is reflected in refrained upward trend of government bill yields in the primary market. additionally, the yields trend retained its trajectory, showing low inflation expectations by financial market agents. at the end of h1 2011, the situation of the financial system and banking sector was stable. the banking sector, expanded its activity and broadened its share in the country ’ s economy. liquidity situation is good while the deposits by the public increased at satisfactory rates ; they cover more than once the value of credits and borrowing from non - residents is low. data indicate that lending growth rate is improving, but the credit portfolio quality continued to drop. the banking sector retains stable growth rates of net interests revenue and gross operational profit. however, tightened capital requirement to cover credit risk, led to lower net financial results of the banking sector compared to a year earlier. however, financial performance continues to be positive and concentrated. the capital adequacy ratio followed a downward trend, even though it remains clearly above the minimum level required by the regulatory framework. analysis of resilience to various shocks and risks indicates that credit risk is the primary source of banking sector risk. furthermore, the banking system is more protected from direct market risks, but it continues to be exposed to the effect, on credit quality, of undesirable exchange rate and interest rates fluctuations. therefore, in its supervisory capacity, the bank of albania requested commercial banks to timely and properly identify non - performing loans, establish relevant reserve funds and take determined action to recover loans through execution of collateral. these actions, combined with reduced operational costs, would establish gradually the conditions for a positive and stable financial position, which would support better the banking sector ’ s need for capital. in a shorter term, the bank of albania has requested the banking sector to strengthen activity capitalisation, through increased shareholders capital. the bank of albania has oriented and monitored this process closely, so that it takes place in compliance with the development strategy and relevant risks performance. the process to strengthen capitalisation indicators in the banking sector includes creation of adequate capital above the required minimum. the bis central bankers ’ speeches process continues in line with specifications that the bank of albania has discussed and communicated with the banking sector. as a result of this measures, the banking sector would remain stable and establish conditions for its higher contribution to albania ’ s economic growth. our assessments on economic outlook suggest a