ardian fullani : overview of albania ’ s latest economic and financial developments speech by mr ardian fullani, governor of the bank of albania, on the monetary policy decision - making of the bank of albania ’ s supervisory council, tirana, 25 july 2012. * * * today, on 25 july 2012, the supervisory council of the bank of albania reviewed and approved the quarterly monetary policy report. based on the analysis of albania ’ s latest economic and monetary developments, and following discussions on their performance outlook, the supervisory council of the bank of albania decided to decrease the key interest rate by 0. 25 percentage point, taking the one - week repurchase agreement rate to a new historical minimum of 4. 0 %. this decision reflects the supervisory council ’ s opinion that the further eased monetary conditions in economy are adequate to meet the inflation target in the medium run. simultaneously, the eased monetary conditions will provide a further incentive to the economic activity at home, by increasing the monetary stimulus to support the domestic demand. let me now proceed with an overview of the economic and monetary developments and key topics discussed at today ’ s meeting. * * * during the first half of 2012, the albanian economy continued to maintain the parameters of macroeconomic and financial stability, against an increasingly challenging global context. consumer price inflation, budget deficit and public debt indicators, balance of payments and financial situation of the banking system were stable or improving. in particular, the albanian financial sector remains well - capitalised, liquid and able to conduct its intermediation role. during this period, the albanian economy experienced some shocks on the supply side, with structural movements in the domestic financial markets, and a slowed domestic and foreign demand. these developments drove the fall in gdp in the first quarter of 2012 and made difficult the implementation of stabilising policies on the aggregate demand. the albanian economy is expected to record positive growth rates as tensions may be reduced in the second half of 2012. average annual inflation marked 1. 9 % in the second quarter of 2012, increasing by 0. 8 percentage point compared to the first quarter of 2012. the gradual rise in consumer prices has mainly reflected the increase in unprocessed food prices, whereas prices of processed foods and those of non - food consumer goods lowered their contribution to inflation during the second quarter of 2012. the other categories in consumer prices basket showed a serene performance, and were characterised by low inflation rates. within the macroeconomic context, consumer prices continue to reflect weak inflationary pressures,

both on the supply and demand sides. on the demand side, the presence of free capacities in using the production factors is reflected in the costs control in economy and in declining pressures on inflation. on the supply side, the slowdown of imported inflationary pressures, decrease in oil and basic materials prices, steady administered prices, low inflationary expectations and minimal second - round effects did not generate inflationary pressures. consumer price inflation remains at low rates and is expected to maintain the same rate in the period ahead. these bis central bankers ’ speeches estimations conditioned the retaining of the stimulating nature of monetary policy during the second quarter of 2012. the key rate stood at the lowest historical level, providing eased monetary conditions in order to meet our inflation target and support the albania ’ s economic activity. also, the bank of albania has continued to inject sufficient liquidity demanded by the banking system, against an expanded collateral base and at adequate maturity terms. according to recent data from instat, the albanian economy recorded an annual fall of 0. 2 % in the first quarter of 2012. industry contracted 19. 3 % y - o - y, mainly due to the significant decrease in electrical energy output. also, construction decreased its activity in real terms, by 17. 6 %, thus providing a negative contribution to the performance of the gross domestic product. by contrast, services contributed positively to the economic activity, pointing to an annual growth of 6. 0 %. agricultural sector grew 4. 5 %, y - o - y during this period, providing a positive contribution to the growth of the gross domestic product. estimations on the aggregate demand in the first quarter of 2012 suggest a continuing weak domestic demand. the consolidated fiscal policy determined the lack of fiscal stimulus in this period and a downturn in public sector ’ s demand for goods and services. private consumption remains slow, thus reflecting the prudent consumer ’ s behaviour and the increasing tendency for saving. private investments also remained low. given the free production capacity, albanian businesses found less room to increase their investments in machineries & equipment, and production, while the demand for resident buildings remains weak. at the same time, foreign demand was sluggish in the second quarter of 2012, owing to the problems in euro zone and in our main foreign trade partners. the weak foreign demand, and the problems in electrical energy production, imposed the slow increase of the albanian exports. data on economy for the second quarter of 2012 are incomplete. indirect data signal a weak recovery