PRESS CONFERENCE
Speech by the Governor of the Bank of Albania, Ardian Fullani, at the Press Conference on the Monetary Policy Decision-Making of the Supervisory Council of the Bank of Albania, 24 November 2010

At today's meeting of 24 November 2010, the Supervisory Council of the Bank of Albania analyzed and approved the Monthly Monetary Policy Report. After scrutinizing the latest economic and financial developments at home and further to discussions on their expected performance in the months ahead, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged at 5.00%. In the Council's view, the current monetary conditions are appropriate for meeting the inflation target and keeping the economic activity stimulus going.

Let me provide a brief overview of economic developments and the key issues discussed at today's meeting.

The Albanian economy in the third quarter and onward has maintained the main development trends noted in the first half of the year. Based on the available data, which are preliminary and mostly indirect, the Bank of Albania concludes that economic activity at home continued to grow in annual terms. Macroeconomic stability has strengthened, while the inflationary pressures are held in check and the risk premium has` been downward.

Economic growth has for the most part been underpinned by foreign demand and the activity generated by a satisfactory tourist season during the third quarter. In spite of its improvement, domestic demand remains subdued due to the sharp fiscal stimulus withdrawal in the second half of the year.

Our projections for economic growth show that it will maintain the current rates and the inflationary pressures will by and large be contained. Private sector's contribution to economic growth will be stronger and the economy will be underpinned by domestic demand to a greater extent than foreign demand. These developments will be buttressed by macroeconomic stability and the lower risk premium in the financial markets.

The low public sector pressures in the domestic financial market and the improved banking system liquidity figures are expected to push lending further, and ultimately, induce consumption and investment in economy. The exchange rate is expected to be more stable due to a more balanced foreign currency demand and supply.

On the other hand, the eventual actualization of the foregoing scenario bears some levels of uncertainty that will affect the macroeconomic management policies and their decision-making. The performance of the Albanian economy with regard to the foregoing will also determine the Bank of Albania's stance in the future.

In what follows, I will elaborate upon the current and expected economic developments and the main conclusions of the Supervisory Council's decisions that motivated today's decision-making.

The global context surrounding economic developments at home shows heightened uncertainty. The world economy continued to show positive but downward growth rates in the third quarter of the year. This slowdown is expected to persist in the fourth quarter. To a large extent, this owes to the lower fiscal stimulus, sluggish labour market, further correction of economic agents' balance sheets and low consumer confidence. Worldwide inflationary pressures remain low, but food and primary commodity prices have picked up. Volatility in the financial markets has elevated due to uncertainties surrounding some countries' public debt performance.

These developments have yielded a less favourable environment for boosting the national economy. These risks are basically reflected in the projections for a lower contribution of foreign demand to economic growth at home and in the eventual impact of the upward tendency of primary commodity prices on inflation. In addition, foreign capital and financial sources may continue to be limited for a longer time than expected due to foreign investors' reluctance to take risk.

Going back to developments at home, worth noting is that statistical information on the performance of the Albanian economy during the third quarter and onward is preliminary and incomplete. However, indirect available data suggest that the positive growth rates of the Albanian economy have extended over this period as well. In addition, the data suggest a more dissimilar composition of growth in economic activity compared with the first half of the year. Hence, this growth has been driven more by the private sector's demand, while the public sector's contribution has been downward. Moreover, domestic demand has provided greater contribution to economic growth, while the impact of foreign demand on economic activity has been weaker.

The analysis of indirect data on consumption and private investment suggests positive but slower growth. The private sector's capacity to offset the room left by fiscal stimulus will remain the main driver of growth in the future. The Bank of Albania considers that the development perspective and current financial conditions allow for faster growth of demand. Above all, consumption suffers from the uncertainty about the future, while private investments need concrete and clear orienting policies.

The Bank of Albania considers that there is room for the Albanian business and consumer to adopt a more optimistic approach in terms of increasing consumption and investment at home in order to ensure that economic growth reaches its potential.

The fiscal sector continued to pursue a prudent policy in order to keep the budget deficit and public debt in check. As at September, the budget deficit totalled ALL 23.9 billion, down by 50% compared to the same period the previous year. In annual terms, public spending contracted by 3.3% during the first nine months of the year due to the significant reduction of capital spending.

On the other hand, revenue was about 7.1% higher than in the preceding year and their annual growth rate has been upward. The Bank of Albania has supported the measures taken over the course of 2010 and the results achieved in terms of fiscal consolidation.

However, against a background of public debt remaining close to the 60% of GDP threshold, we consider the persistence of fiscal awareness in the years ahead as highly essential. Therefore, the drafting of budget and projections of fiscal indicators for 2011 and onward should be based on cautious assumptions and forecast, and the addressing of potential risk factors should be made duly. In turn, this would ensure one of the main premises for achieving the fiscal deficit and public debt objectives, thus contributing to fiscal sustainability in the medium and long run.

The latest data on the external sector of the economy provide evidence for the curbing of trade deficit correction rates, attributable to the moderate growth of export and more accelerated increase in import.

Trade deficit contracted by merely 0.7% y-o-y in the third quarter of 2010, due to the increase of export and import by 45.3% and 9.5%, respectively. The curbed effect of transitory factors is expected to lead exports to a more normal escalating trajectory. Imports in the meantime will be more stable against a background of improved demand. Therefore, current account deficit correction and sustainability require greater attention in the future.

Economic developments have produced an environment of contained inflationary pressures. Below-potential economic growth has curbed inflation, thus eliminating the augmented inflationary pressures arising from imported inflation or the rise in administered prices. The monetary policy pursued by the Bank of Albania has contributed to providing appropriate monetary conditions for the development of economic activity in line with the price stability objective and for keeping the inflationary expectations contained.

Annual inflation marked 3.0% in October, down by 0.4 pp from September. The absence of demand-side inflationary pressures was expressed in low core inflation rates of 1.9%.

The improved exchange rate stability has slowed imported inflation down. The lower headline inflation rate in this month is to a large extent attributable to the termination of effects of the rise in some administered prices a year ago. Inflation will continue to be affected by the previous rises in administered prices until the end of the first quarter of 2011 and it may be affected by other rises in the periods ahead.

The analysis of monetary indicators attests to the presence of contained monetary inflationary pressures in economy in the medium run. In September, money supply grew by 12.4% y-o-y, approaching its historical average.

In the meantime, the sluggish domestic demand was also reflected in the low private sector demand for bank lending. Private sector credit grew by 8.0% y-o-y in September, similar as in the first two months' average of the third quarter of 2010. The credit growth rates are however low.

The Bank of Albania considers that the banking system's balance sheets and financial position allow for a more active role in fuelling lending in the future. The Bank of Albania has provided the appropriate conditions for sustaining lending activity by:

• Furnishing the market with ample liquidity,
• Safeguarding macroeconomic stability,
• Ensuring the banking system's financial soundness, and
• Lowering the interest rates and transmitting them fully to the financial markets.

The financial markets featured low risk and liquidity premium, reflected in the continuous decrease of the yields in the primary market and interest rates in the ALL deposit and credit market. In the interbank market, short-term interest rates remained close to the key rate and showed low volatility. Foreign exchange in the Albanian forex market was also calm. The exchange rate was more stable as a result of the current account deficit correction and other macro financial equilibriums in economy.

Considering the foregoing information, the Supervisory Council assesses that the inflationary pressures are well-contained in the medium run. The inflationary expectations will remain anchored around the Bank of Albania's target for inflation.

In the absence of abrupt shocks, inflation is expected to mark rates within the central bank's target in the medium run. The risk factors surrounding this baseline scenario are also balanced.

At the end of discussions, the Supervisory Council concluded that the monetary conditions are appropriate for observing the inflation target in the medium run and decided to keep the key interest rate unchanged at 5.00%.