In its meeting of December 23, 2009, the Supervisory Council of the Bank of Albania analysed the Monthly Report of Monetary Policy. After dwelling upon the latest economic and financial developments of the country, their projections for the future and the expected balance of risks, at the end of discussions, the Supervisory Council of Bank of Albania decided to keep the base interest rate unchanged, at 5.25 percent.

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Recent developments in the global economy have given positive signals for improvement in the economic activity performance. The main developed and developing countries have experienced an economic growth on a quarterly basis, while the world trade and confidence indices have shown improvement signs. The world economy is still far from full utilization of capacities, thus impacting on the maintaining of high unemployment rates. The limited capacity utilization rate impacts also on keeping inflationary pressures at low levels.

However, these pressures have lately been upward, due to optimistic news of oil and raw materials prices.

The latest data on the domestic economy performance indicate a slowdown in the economic activity. Unlike the first half of the year, when the economic growth was supported by the preservation of consumer demand and fiscal incentive provided over this period, the economic data for the third quarter and for the coming months indicate a more moderate pace of demand and production in the economy. This is evidenced by a number of indicators published in November, such as: the slow progress in retail sales index rise; data on external economy, which continue to be featured by decline in exports; performance of fiscal indicators, which seem to be below the projected level; and lending curbing, due to the decreased demand for it. The economy slowdown is also perceived by consumers and businesses, whose confidence indicators continue to be low. The future performance of the economy will significantly depend on the revival of consumer spending and investments in the country, the degree of their coverage from bank loans, foreign direct investments or any other form of long-term financing.

In general, the macroeconomic situation of the country has created an environment of weak inflationary pressures. Also, supply factors or those originating outside the Albanian economy have not produced strong inflationary pressures over this period.

Annual consumer price inflation recorded 2.8 per cent in November, close to the Bank of Albania’s target. Average annual inflation rate stood at 2.1 percent for the third consecutive month. Lack of pressure from domestic demand and low inflation rate in partner countries have balanced the pressures exerted by the domestic currency’s depreciation during 2009. This performance is manifested even by the steady performance of core inflation, whose low levels confirm the presence of a controlled inflationary environment.

Latest upward trend of consumer price inflation was an expected development for the Bank of Albania. It mostly reflects either the temporary or the technical factors, which, though operating for a short period of time, they do not comprise a persistent source of inflationary pressure.

The latest data on the external economy indicate trade deficit widening during the first nine months of 2009, recording a rise of 20 percent related to the previous year. In relative terms, the current deficit level accounts for 17.3 percent of GDP. On the other hand, foreign currency inflows to capital and financial account resulted 21 percent higher than in the previous year. Their share to GDP is estimated at 19.8 percent, making the country's balance of payments turn out positive during the first three quarters of 2009. However, high and upward levels of current account deficit will require more quantities of foreign currency funds to finance it.

Therefore, long-term sustainability of the balance of payments requires a greater attention by policy makers, projecting also the political measures and structural reforms.

Short-term developments in foreign trade for October reflect a different performance compared to the first nine months of the year, showing correction attempts of the trends observed earlier. Country's exports fell by about 9 percent in annual terms, while imports recorded an annual decline of 21.4 percent. In consequence, the trade deficit for the first ten months of the year contracted by 5 percent compared to the previous year, thus giving signals for its stable performance.

Fiscal policy continued to be expansionary during 2009, but this feature was diminishing during the second half of the year. The country’s economic activity slowdown is also reflected in the performance of fiscal indicators. Fiscal developments during the last two months were characterized by a smaller increase of budget revenues - only 4.5 percent in annual terms - mainly due to the declining contribution of VAT and profit tax revenues. Meanwhile, public expenditures continued to maintain high growth rates - by 16 percent. Most of the deficit is financed from foreign borrowing and privatizations receipts, without exerting any pressure on the domestic market.

Though the growth rates of the budget deficit have slowed down during the last two months and its level in late October was in line with the projected limit for this period, this deficit continues to be high compared to its historical levels.

The Bank of Albania deems that accomplishment of the medium-term fiscal target for reducing public debt (in relative terms) should guide the fiscal policy over the coming periods. Its accomplishment will foster the public confidence in the country's macroeconomic policies, will serve as a stable basis for the country's macroeconomic stability, will reduce risk premiums in the economy and will create more breathing space to the private sector. This goal should be materialized into practice by pursuing prudent fiscal policies, always in line with the real economic developments.

Turning to monetary developments, the Bank of Albania deems that their overview for November is mixed. The pace of monetary supply growth has accelerated and interest rates have been falling, but credit to the economy has slowed down during this period. In November, the broad money increased by 5.6 percent in annual terms, reflecting the stabilization of banking system liquidity as a result of continuous return of deposits and improved foreign exchange position. Positive developments in deposits performance during the month and their time frame shifting towards time deposits confirm the tendency to restore confidence in the banking system.

Meanwhile, the lending activity of banks has slowed down, recording an annual growth of the loan portfolio by only 12 percent. Business credit has the major share to loan portfolio expansion, while consumer credit and mortgage loans are contracted.

Low levels of loan portfolio expansion reflect not only the liquidity constraints in the banking system, but also the decline, to a certain extent, of the demand for consumption and investment, as a consequence of weakening economic activity. The future credit performance will be an important determinant of the economic activity. The Bank of Albania deems that the banking system can and should make more efforts to transmit its easing monetary policy to a higher lending to the economy. Subject to fulfilling our mandate to control inflation, we are willing to help the banking system by taking the necessary measures to revive the lending market.

In this context, even during November, the Bank of Albania continued to fully meet the demand of the banking system for liquidity, through the repo instrument. Interbank market indicators attest to an increased trading volume, while interest rates have reflected a downward trend, following the base interest rate cut at the end of October. The base interest rate cut is also reflected in the primary market, when for the first time during 2009 the government securities yields have recorded a decline, for all maturity terms. The banking system has responded by reflecting it to Lek-denominated loan and deposit interest rates. The agents’ response to base interest rate cut is expected to be further conveyed to the credit and deposit market, keeping to time lags in monetary policy transmission.

Exchange rate performance continued its depreciating trend even during November, but at a slower pace. The Lek’s depreciation, which has been present throughout this year, is balanced by lower prices of imported goods, without comprising any material risk for exceeding the targeted inflation rate.

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At the end of discussions on current and expected performance of economic developments, the Supervisory Council of Bank of Albania concluded that inflationary pressures are expected to be low in the medium run, being reflected in consumer price inflation around the lower limit of the Bank of Albania's target. On the other hand, risks to price stability are currently estimated as relatively balanced. Restraining factors, such as the monetary supply slowdown, assessments regarding the slowdown of domestic demand and economic activity rates, low level of utilization of free capacities in the economy and low rates of price rise in the main partner countries, would balance the inflationary pressures deriving from the exchange rate and price rise in world markets.

The Supervisory Council decided to keep the base interest rate unchanged. This decision aims at preserving and further consolidating the macroeconomic balances, considering the macroeconomic stability as a necessary precondition for a sustainable and long-term growth.
It also ensures the due monetary support to the economy during this stage of its development.

In the future, the Bank of Albania remains committed to operate in line with the actual and expected performance of the economic indicators. Aiming at curtailing the inflationary risks, the consolidation of financial stability and of inflationary expectations in the economy will be taken into consideration by the Bank of Albania’s decision-making.