PRESS CONFERENCE
Speech by Ardian Fullani, Governor of the Bank of Albania, at the press conference on the Monetary Policy Decision-Making of the Supervisory Council of the Bank of Albania, 28 April 2010

In its meeting of 28 April 2010, the Supervisory Council of the Bank of Albania analysed and approved the Monetary Policy Report of the first quarter of 2010. In the light of the latest economic and financial developments, the future outlook and the expected risk balances, at the end of discussions, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged at 5.25%.

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The world economy continued to show signs of improvement during the first quarter of this year. The economic activity, trade activities and capital flows are upward. Low capacity utilisation has generated inflationary pressures at low levels, but with a clear upward trend due to the recovery in the demand. Central banks continue to pursue an easing monetary policy, while there has started the work for withdrawing from unconventional policies undertaken at the onset of and during the global recession.

Financial markets have been characterised by declining interest rates, low risk levels and increased trade. However, the expectations for low lending levels during 2010, in terms of withdrawal of monetary and fiscal stimuli in most of the countries and the high levels of unemployment, will condition the performance of global aggregate demand.

Statistical information, which provides figures on the Albanian economy performance, was partial. However, the analysis of fiscal and monetary developments, inflation and external sector's performance and the quality of information obtained from the Bank of Albania through its surveys, create an overview of economic developments. According to INSTAT, the domestic economy recorded a positive growth of 3.3% in 2009. After the positive growth rates recorded during the first nine months, the economic activity contracted in the last quarter of 2009. Based on preliminary data, gross domestic product fell by 0.8% in annual terms during this quarter. This performance is determined by shrinkage of private and public investments, and the significant slowdown of private consumption. Low growing rates of wages and employment, the greater tendency of consumers to save, triggered a slower pace of consumption in the last quarter of the past year. Private investments contracted during this quarter, against the backdrop of slowed domestic and external demand slowing down and low capacity utilisation rate. Also, the reduction of fiscal stimulus during the last months of year 2009 was reflected in a lower contribution from public investments to the economic growth during the last quarter. As shown by performance of fiscal and monetary indicators and by consumer business expectations, the domestic economy performance is assessed as slow even during the first months of this year.

The average annual inflation pointed to 4.1% for the first quarter of 2010, slightly above the upper tolerance band of the Bank of Albania's inflation target. During this quarter the rise in administered energy price has contributed by 0.5 percentage points to the shaping of annual inflation, thus determining the exceeding of this limit. Meanwhile, inflation marked 3.9 %in March, returning within the Bank of Albania's targeted band. The upsurge of inflation during the first months of year is considerably conditioned by the supply-side factors. Besides electricity price rice, the limited supply of domestic agricultural output, and the upward trend of raw materials prices in the world market, in the presence of the national currency's depreciation effect, have exerted upward pressures on inflation. However, it is considered that these factors influence inflation temporarily. The performance of core inflation and non-traded inflation rates, which are close to their long-term historical average, attest to low demand-induced inflationary pressures. Over the medium run, the slowed domestic demand and the below-the-potential economic growth are expected to impede the creation of any sustainable inflationary pressures, thus balancing the direct effect of supply-side factors.

Developments in the external sector of the economy during the first two months of this year are characterised by a narrowing trade deficit at home. The trade deficit has narrowed by about 20% in annual terms, reflecting an annual increase in exports and an annual decline in imports, respectively by 31% and 7%. This positive performance has also led to establishing more balanced ratios of the demand and supply for foreign currency, resulting in a steady exchange rate levels. Although trade deficit correction over this period is an encouraging development, its long-term sustainability requires ongoing structural reforms in the economy. In particular, the growth of savings in the economy should be encouraged through deepening and implementation of the pension system reform. It will support the long-term sustainability of this system and will create appropriate conditions for increasing domestic and long-term financial funds, serving the correction of the current account deficit at home.

During the first months of 2010, the fiscal policy pursued the refraining trend of fiscal expansion that appeared in the last quarter of 2009. Budget expenditures increased at e restrained pace of around 4% in annual terms. On the other hand, the demand slowdown continues to dictate low growth paces of budget revenues. The pursuit of a prudent fiscal policy, notwithstanding with a lower contribution on the economic growth of this year, will help the consolidation of fiscal indicators at sound levels, thus better serving the economic growth sustainability and the maintaining of macroeconomic balances in the long run.

The first two months of year were featured by an ongoing positive performance of monetary indicators. Money supply grew on an average by 8.3% in annual terms, supported mainly by the increase of foreign-currency denominated deposits. The low intermediation of banking system has created little room for growth of broad money in the economy. Lending to economy, though increased at higher rates in last quarter of 2009, remains at low record levels in recent years.

Annual growth of credit to the private sector, excluding exchange rate effect, resulted 5.4% in February. Credit to the business reflected a better performance in the first months of this year, as a result of improved foreign currency liquidity and easing credit terms conditions for them. On the other hand, households' credit continues to shrink at similar rates to those of last year-end. Despite these developments, the credit demand remains low, due to slowed economic activity in the country and more prudent stance of economic agents in terms of borrowing.

The Bank of Albania has pursued a prudent monetary policy, in support of meeting our inflation target and the needs of the economy for liquidity. Bank of Albania has been present in the interbank market, providing the necessary liquidity for a normal development of the financial markets. The latter have been characterised by reduced risk premiums, increased transactions volume and falling interest rates.

Upon improvement of the banking system's liquidity position and normalisation of risk premiums, in January of this year, the Bank of Albania decided to re-apply standardised repurchase agreement auctions: weekly injecting operations at a competitive interest rate. Performing these auctions at a fixed interest and unlimited amount in November 2008 to December 2009 was one of the measures taken by the Bank of Albania against the tightened liquidity position and rising risk premiums and increased uncertainty during that period. Returning to standardised auctions of the main instrument of the Bank of Albania marks the beginning of withdrawal of these measures in response to normalized situation in financial markets at home.

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The Supervisory Council of the Bank of Albania concluded that inflationary pressures on economy are expected to be balanced in the medium term.

Assessments for a slowdown of domestic demand and the enlargement of negative output gap are expected to balance the short-term inflationary pressures from the supply-side. At the same time, inflationary expectations are well-anchored close to the Bank of Albania's target.

At the end of discussion, the Supervisory Council decided to maintain the key interest rate unchanged at 5.25%. This decision serves to the following of inflation target in the medium-term run. Bank of Albania, in the future, remains willing to operate in line with the current and expected performance of the economic indicators. In particular, its decisions will continue to be oriented toward the maintaining of price stability and further consolidation of macroeconomic balances.