ardian fullani : bank of albania ’ s work progress, 2012 results, and challenges for the future speech by mr ardian fullani, governor of the bank of albania, at the parliamentary commission on economy and finance, tirana, 9 april 2013. * * * honourable chairman, honourable deputies, ladies and gentlemen, i would like to start by expressing my great appreciation for this opportunity to present to you, on behalf of the bank of albania, the central bank ’ s work progress and results over the past year. also, this meeting will let us share our opinions about recent economic and monetary developments, and touch upon the challenges, which, in bank of albania ’ s opinion, deserve attention in the future. right from the start, i would like to emphasize that the bank of albania succeeded in fulfilling its legal responsibilities in 2012. consumer prices remained stable, as depicted by the 2 % average inflation rate during the year. the financial system soundness also improved at both macro and micro levels. the major objectives of the bank of albania were achieved, despite adverse internal and external environment, and shocks posed to albanian economy over this period. their achievement reflected, to a great extent, the bank of albania ’ s cautious monetary policy, regulatory measures and our policy of banking supervision. they were favoured by ongoing improvement of the financial payment infrastructure, prudential and efficient liquidity management operations, and transparent communication with the public. the whole our work was supported by qualitatively improved financial literacy of the public, analytical study of several phenomena, matters of interest for the development of the country, and production of financial statistics conform to international standards. finally, i would like to emphasize that the bank of albania has been a serious and important player in albania ’ s integration project, completing and updating all its legal responsibilities and institutional commitments. * * * honourable ladies and gentlemen, in my speech, i will address the key issues of the annual report, focusing on main directions of bank of albania ’ s work over the past year. i will start my speech with our work and results in fulfilling the primary objective : achieving and maintaining price stability. 1. economic developments, price stability and monetary policy in 2012 as i said in the introduction of my speech, the year 2012 was another difficult year for the albanian economy. weaknesses in our financial and trading partners were manifested in a low demand for albanian exports, tight financing conditions for foreign capital, and elevated uncertainty among economic agents. also, the public and private sector domestic

- to - day consumer goods and services, was an added contribution to consumer price hike. on the other hand, the contribution of non - processed foods to inflation was stable. gradual upsurge of domestic food products supply during the second quarter, balanced the effect of these items price increase in international markets. lastly, administered prices and increased excise on some products had an increasing impact on annual inflation, albeit lower compared to a year earlier. concerning the macroeconomic aspect, a number of factors contributed to inflation at this period, with various degrees of intensity and opposite directions of action. upward inflation pressures were generated mostly by conjunctures of raw material and primary commodity bis central bankers ’ speeches prices in international markets. imported inflation was transmitted directly to increased consumer goods prices in albania. it exercised additional pressures on production costs and inflation expectations, but these second - round effects remained controlled. furthermore, the negative output gap continued to exercise downward pressures on prices balancing, in part, the effect of foreign price increase. the expansion of economic activity continues to be below the potential of the economy, leaving unutilized capacities in the labour and capital markets. under these conditions, inflationary pressures from the real sector of the economy remain controlled. this is reflected also on the base inflation performance, which, although upward, remains anchored within the bank of albania ’ s medium term inflation target. moreover, monetary indicators generated contained inflation pressures, reflecting also a prudent monetary policy of the bank of albania. in march, the supervisory council of the bank of albania decided to increase the key interest rate by 0. 25 basis points, to 5. 25 %. this decision was made in response to added inflation pressures of foreign origin. it aimed at retaining the anchoring of economic agents expectations on inflation and minimising secondround effects. even after this increase, domestic monetary conditions remained stimulating and provided the economy with the appropriate support at this stage of its development. in line with the action time - span, this measure is considered to have been effective in signalising the commitment of the bank of albania to comply with its inflation target and keep inflation expectations under control. in addition, it kept unchanged the stimulating characteristic of the monetary policy and conditions as reflected in comparatively low interest rates, banking system ample liquidity and exchange rates favouring albanian exports. let me now focus on economic highlights defining the inflation performance as well as their expected development. in line with its past year ’ s performance, the expansion of the albanian economy during