PRESS CONFERENCE
Speech by Mr. Ardian Fullani, Governor of the Bank of Albania, at the press conference following the Bank of Albania Supervisory Council's decision on increasing the key interest rate by 25 basis points

In its meeting on 27 November 2007, the Supervisory Council of the Bank of Albania analyzed the economic and financial developments in the country.

Annual inflation rate marked 4.2 per cent in October, being above 4 per cent for the third consecutive month. However, average annual inflation rate remains close to the 3 per cent target of the Bank of Albania, reflecting the low inflation rates in the beginning of the year.

The supply-side pressures on inflation rate continued to be high. There have also been demand-side pressures which were manifested in a high core inflation rate of 3.5 per cent. This is about 2 per cent higher than the rate marked in the mid year.

The continuous increase of inflation during the last months has increased the consumers' expectations for the price rise of goods. The expectations for the increase of inflation have a direct impact on preserving an inflationary environment in economy.

The monetary developments have reflected the performance of credit to economy and credit to the government. On one hand there is a stable growth of credit to economy by more than 50 per cent. On the other, fiscal balance is characterized by temporary absence of liquidity as a result of the non-timely execution of budget expenses.

Credit portfolio continued to grow over October. The annual growth of credit continues to be high by about 52 per cent. The growth rate of credit to businesses was about 44 per cent, while the growth rate of credit to households was about 68 per cent which reflects the high demand of the banking system for financing.

The increase of the lek interest rates dominated the money market, the securities market and the deposits market, reflecting a satisfactory level of transmission of the decision taken in September by the Bank of Albania which raised the key interest rate by 25 basis points to 6 per cent.

The banking system continued to operate under tight liquidity conditions causing the operational policy of the Bank of Albania to be oriented towards the short-term injection of liquidity through weekly reverse repo auctions in the open market. In October was injected a total of about ALL 3 billion at an interest rate of 6.3 per cent which is 30 basis points above the key rate.

Treasury bills yields in the primary market increased for all maturities, in particular for the 3-month maturity. As of end October the 3-month yield reached 6.08 per cent or 32 basis points higher than the end-September yield.

ALL deposits' interest rates continued to increase following the signal for the increase of interest rates in the second half of the year. The average 12-month interest rate increased to 6.06 per cent in September from 5.78 per cent as of end June. Compared with the previous year average 12-month interest rates have increased by 0.84 per cent - during this period the core interest rate has increased by 75 basis points. Preliminary data indicate that the banking system will further increase the interest rates. This performance has led to the increase of the difference between the domestic currency and foreign currency interest rates in favour of the domestic currency.

The lek appreciated to the US dollar and the euro in October by 3.6 and 1.2 per cent. The considerable appreciation of the lek to the US dollar was mainly influenced by the developments in the international market where this currency has depreciated considerably to the euro. The developments in the domestic demand/supply ratio have supported the appreciation of the lek to the euro. The absence of the seasonal demand was accompanied by a higher supply of banks for foreign currency (as a result of the conversion of some banks' capital), resulting in the appreciation of domestic currency. The appreciating pressures of the lek are also supported by the positive difference of interest rates between the domestic and foreign currency.

In nominal effective terms the lek appreciated by 3.3 per cent to other foreign currencies compared with the previous year. Worth mentioning is the fact that the appreciation of the lek by 8.7 per cent to the US dollar has absorbed a large part of the price rise of raw materials in the international markets.

The dynamics in the current and expected macroeconomic developments confirms the presence of inflationary pressures in economy whose balance is still on the upward side. The Supervisory Council of the Bank of Albania reached this conclusion after having analyzed:

- The Bank of Albania projections for the inflationary developments in the following 12 months;
- The fiscal budget projected for 2008;
- The banking system's expectations of inflation, the exchange and interest rate for 2007 and 2008;
- The results of the business and consumer confidence surveys for the third quarter of 2007;
- The survey results on the possible influence of energy crisis of 2007 on the business performance.
After having carefully analyzed this information the Supervisory Council decided to communicate to the market, other economic agents and the public at large the factors which are assessed as being risk factors to the future of price stability in economy.

Credit to economy
The rapid growth of credit to economy in the last years has provided the grounds for the rapid growth of domestic demand in economy. This influence becomes even more significant when referring to the growth of consumer credit which directly supplies the economic agents' sentiments to consume more leading to the increase of inflationary pressures in economy.

Fiscal policy
So far the positive net balance on fiscal account signals that the budget deficit of about 3.5 per cent projected for 2007 will actualize in December 2007 and in January 2008. As a result the effects on the aggregate demand will extend over 2008. 2008 fiscal deficit planned to increase will also add to this impulse. Compared with the present year, which has been mainly dominated by the positive fiscal balance, their total effect constitutes a considerable pressure on aggregate demand.

Current account
According to the most recent data it is assessed that the deficit on current account accounts for about 9 - 10 per cent of the GDP which indicates a higher consumer trend and consequently pressures for the price rise in the domestic economy.

Prices of raw materials and the secondary effect
The current market situation has confirmed the presence of increasing pressures of prices in economy as a result of the effect of raw materials and oil prices and of the energy crisis. These effects are considered to be direct and they may generate second round effects. The general tendency is that the transmission of these costs to consumer prices will occur in the medium term.

The rise of administered prices
In the context of the approximation of the sale prices with the purchase costs the KESH has recently made public the intention to further increase the energy price which will have a direct impact on the CPI for the following 12 months. Among others considering that energy is a consumer product it will also generate indirect effects.

Based on the above mentioned considerations the Supervisory Council of the Bank of Albania decided to increase the interest rate applied on repurchase agreements by 25 basis points to 6.25 per cent.

The increase of the key interest rate aims to better contain the pressures generated by domestic demand, to better accommodate the supply-side fluctuations and to orient the inflationary expectations to the Bank of Albania numerical target of 3 per cent.

Its reflection in the financial markets and the money market instruments will establish a more stable balance between the monetary stimulus of the economic activity and the generated inflationary pressures. In addition the increase of the key interest rate aims to preserve the time and foreign currency structure of monetary assets in line with their historical trends and to re-evaluate the incentives for keeping the savings in Lek.

The Bank of Albania remains vigilant and it will make its utmost efforts to keep its decisions in line with the main objective - maintaining consumer price stability.