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, 30 october 2013. * * * today, on 30 october 2013, the supervisory council of the bank of albania reviewed and approved the quarterly monetary policy report. based on the most recent monetary and economic developments in albania, and following the discussions on their outlook, the supervisory council of the bank of albania decided to keep the key interest rate unchanged, at 3. 5 %. the council notes that the inflationary pressures deriving from the real and financial sectors of the economy are weak and will continue to remain so. these circumstances require the stimulating monetary policy to persist in the period ahead. the monetary stimulus, transmitted through the low key interest rate and continuous injection of liquidity, provides the required conditions for meeting our medium - term inflation target. let me now proceed with an overview of the economic developments and key issues discussed at today ’ s meeting. * * * the albanian economy was characterised by slow economic growth and weak inflationary pressures throughout 2013. economic growth slowed down to 1. 1 % in the second quarter, while available information suggests weak economic activity will continue in the third quarter. the weak private demand offset the increasing positive impulses generated by the fiscal stimulus and foreign demand, in the first half of the year. consumption and private sector investments were weak, whereas foreign demand continued to slow down, given the economic situation in our trading partner countries. the private agents ’ uncertainty about the future was reflected in low propensity to spend and weak credit demand. this uncertainty prevented the transmission of the monetary stimulus to the economy. moreover, banking system conservative policies maintained the lending standards tight, and prevented the normal functioning of the monetary policy transmission mechanism. against this backdrop, economic and financial stability of the country was preserved. private agents ’ expectations on inflation were anchored around bank of albania ’ s target, showing a good perception of monetary policy signals, and effective communication of the bank of albania. the banking system remains sound and well capitalised with ample liquidity to ensure the return of financial intermediation to adequate levels, in spite of credit qualityrelated problems. average annual inflation continued the decelerating trend in the third quarter, settling at 1. 5 %. the profile of inflation was determined almost entirely by the contribution of inflation from prices of agricultural products.

should monetary policy respond to such a reduction in labour force participation? bank of england the first thing to note is that this does not seem to be a case in which participation has fallen in response to weaker economic conditions and a weaker labour market. this is not a fall in participation driven by a shock to demand. so, we should not expect there to be a margin of spare capacity outside the workforce that exerts downward pressure on inflation in a way that would call for a lower level of interest rates to stimulate demand. instead, the rise in economic inactivity is a change to the supply of labour, independent of demand, in particular by older workers. if those workers have accumulated enough savings to sustain a desired level of consumption much like the one they had before their early retirement, at least for a while, aggregate demand will not have fallen by as much as aggregate supply. we should expect this to put upward pressure on inflation in a way that would call for a higher level of interest rates to dampen demand. so while population ageing is very likely to pull long - run r * down, as i discussed earlier, the effects on shorter - run r * from a change in labour force participation are harder to assess. in the shorter run, by reducing the productive capacity of the economy, the rise in inactivity driven by early retirement seems likely to have contributed to a rise in cyclical r *. this is part of the reason why we have had to raise bank rate by as much as we have. monetary policy in the time of covid let me take a step back and revisit our response to covid in light of this discussion. this episode is a particularly clear example of how difficult it can be in practice to judge the relative impact of supply and demand. the pandemic was highly unusual and difficult for many reasons. in terms of the economy, it was unusual for the sudden and extreme fall in economic activity, but also for the almost synchronous and equivalent fall in both aggregate demand and supply. in most recessions, demand falls much more abruptly than supply. an output gap opens up, creating spare capacity in the economy and usually a rise in unemployment. that is not what happened during covid. the reason this unusually synchronous pattern of movements in aggregate demand and supply took place is not hard to find. government policy on public health, in the face of the most extreme pandemic for at least a century, led to deliberate