The main objective of the Bank of Albania is to achieve and maintain price stability. The achievement and maintenance of price stability is actualized through the definition of objectives related to the inflation rate. Achieving price stability implies attaining low positive inflation rates or consumer price change. Maintaining price stability implies ensuring low positive inflation rates for relatively long periods.
The medium-term strategic objective of the monetary policy is to maintain inflation in low positive rates, which on one hand, ensure stability in the markets and on the other, sustain economic growth. In the medium-term, the Bank of Albania is committed in maintaining annual inflation at 3.0%, with a tolerance band of ± 1.0 percentage point. The annual increase of consumer price index, measured and published by the INSTAT, is considered as the inflation objective.
In view to enhance the quality of decision-making, the Bank of Albania uses other inflation measures. These measures provide a more complete basis to take more realistic decisions. Other inflation categories are as follows:
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Core inflation. The Bank of Albania will continue to work over 2006 to build the core inflation series and to improve the methodology of its measurement. Core inflation is an important input in the monetary policy decision-making process.
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Average annual inflation. It represents the average annual inflation for the last twelve-month period, providing useful information on the trends of consumer prices. As such, average annual inflation is an essential orienting indicator in the monetary policy decision-making process.
Moreover, the Bank of Albania is intensively working on expanding the information range used in the decision-making process. Moreover, it is making its efforts to reinforce the transmission channels and to enhance its analytical skills, improve its communication with the public quantitatively and qualitatively, aiming at enhancing the monetary policy efficiency.
The main objective of monetary policy is to achieve and maintain price stability. In order to meet such an important target, the Bank of Albania employs a set of intermediate and operational (quantitative) targets. Intermediate targets serve as indicators, while the operational ones are strictly adhered to. In any case, the focus lies on the achievement of the main objective.
The intermediate target is measured as the annual growth rate of money supply (M3 monetary aggregate). Considering the inflation as a monetary phenomenon, controlling money growth is very important. The operational targets are the net domestic assets of the Bank of Albania plus those of banking system (net domestic credit to Government) and net foreign assets of the Bank of Albania. There is a quantitative limit set for each target, the meeting of which controls the work done to attain them.
Net domestic assets of the Bank of Albania represent the total claims of the Bank of Albania, except for claims in foreign currency to non-residents. Practically, this category includes the (net) claims of the Bank of Albania on the Government, as well as the claims of the Bank of Albania on commercial banks. The Bank of Albania can not exceed an upper limit set for its net domestic assets.
Net domestic credit to the Government represents the total claims of the banking system on the Government, less Government's deposits within the Bank of Albania and commercial banks. Setting an upper level for net domestic credit to the Government aims at keeping the projected levels of fiscal deficit financed by the banking system, under control.
Net international reserves of the Bank of Albania represent the net foreign assets of the Bank of Albania, less all foreign assets of commercial banks held with the Bank of Albania (required reserves and excess reserves in foreign currency). Net international reserves should not fall below a floor level and they are calculated using the exchange rate at end of September 2005.
The performance targets are reviewed at regular time periods (every six months) and recalculated in view of latest developments.
