therefore, has a current focus on anti - inflation policy which will ensure steady growth in the long run. since april 2005 in response to the headline inflation reaching 11. 3 %, sbp has been and remains in monetary tightening phase. it has to be recognized that the inflationary pressures build up in 2005 because of the preceding few years of easy monetary policy. while sbp addressed this overhang by raising policy discount rate from 7 to 9 % in april 2005, there were renewed demand pressures as fiscal and external account deficits rose in wake of both international oil price increase as well as unforeseen spending demands triggered by the earthquake. to offset additional demand pressures, sbp had to further raise its policy discount rate by 50bp in july 2006 along with 4. 5 percentage point upward revision in reserve ratios. in line with the evidence observed for developing countries, impact of monetary tightening on curbing inflation started to be visible after 12 - 18 months or so. as aggregate demand pressures moderated, cpi fell to 7. 9 percent in fy06 ( remaining well within the annual target of 8 % ) and cpi continued to decline to 7. 7 % in march 2007 with core inflation being still low at 5. 4 %. however, cpi remains above annual target of 6. 5 % largely because of a number of factors that disrupted the impact of monetary tightening : ( i ) food prices remained quite volatile during fy07 due to supply disruptions ; ( ii ) higher fiscal pressures resulted in greater than planned recourse to the central bank borrowing. more specifically, government has borrowed rs. 180 billion for budgetary support by 14 april 2007 compared with only rs. 37 billion during the same period last year. during the later part of fy the government has been retiring part of the central bank borrowing and financing its deficit by external flows or commercial bank borrowings ; ( iii ) heavy borrowing from commercial banks seems to have been crowding out private sector borrowing for long - term investment as banks find it convenient to park their funds in government securities rather than lending ; ( iv ) sbp being mandated to provide higher than projected refinancing for the textile sector – besides its high borrowing to meet working capital requirements through efs, textile exporters were allowed debt swap and new long term borrowings which ranged around rs50 billion ; and ( v ) higher than expected foreign inflows are expected to enhance the levels of net foreign assets and result in monetary expansion. together these

is a positive signal for the long - term stability of this indicator and assists in stabilizing the demand for and supply of foreign currency in the domestic market. developments in the monetary sector attest to low inflationary pressures in the economy. monetary assets expansion slowed over the third quarter, reflecting the decline in the domestic demand for money. the public sector ’ s prudential behaviour has led to a low demand for monetary assets, particularly from the banking sector. on the other hand, the slow economic activity and available spare capacities appear to have restricted the private sector ’ s demand for monetary assets. private sector credit increased by 5 %, y - o - y, in august, following the slowing trajectory having started since the second half of 2011. developments over the past months show that banks are more active in national currency intermediation, while they have decreased their foreign currency intermediation. this development is driven by banks ’ readiness to invest lek funds and economic agents ’ increased awareness of foreign currency credit risk. regarding lending concerns, we would emphasise that the weak credit performance owes mostly to economic agents ’ low demand for monetary assets. however, the bank credit supply appears somewhat tightened. the banking system remains prudential in selecting the projects it finances, as a consequence of deteriorated loan portfolio quality and uncertainties surrounding the future outlook. banks continued to maintain tight lending standards, appearing rather selective in assessing the business plans and meeting the demand for loan. overall, the bank of albania assesses that creating a positive climate assists in recovering lending and the demand for loan. the albanian banking system remains well - capitalised, liquid and capable of meeting the economy ’ s needs for credit. however, within the parameters of financial prudence, it should be forward - looking about its decisions and more flexible in providing financial support to albanian business. financial markets were characterised by a downward interest rate trend over the third quarter, associated with low liquidity pressures and reflecting the bank of albania ’ s easing monetary policy. bis central bankers ’ speeches increased interbank market activity suggests the increased efficiency in using this market and is a good premise for developing the overall monetary market in albania. over the period, the easing monetary policy signals in terms of lowering the government security yields were better transmitted. this transmission was favoured by completion of structural movements in the banking system and reduced government demand for funding. deposit interest rates continued to fall as well, but as already reflected by the high deposit growth over this quarter, they did not restrain the