PRESS CONFERENCE
Statement by Mr. Ardian Fullani, Governor of the Bank of Albania, at the Press Conference following the Bank of Albania Supervisory Council's decision on the increase of the core interest rate

In its meeting on 30 November 2006, after being introduced to the latest economic and financial developments, the Supervisory Council of the Bank of Albania decided to increase the core interest rate in economy by 0.25 percentage points (repurchase agreements rate of one-week maturity). Following this raise, the core interest rate reaches 5.5 per cent, from 5.25 per cent.

Annual inflation in October marked 2.2 per cent, being close to the inflation rate targeted by the Bank of Albania. Annual inflation for October was influenced by a number of positive transitory factors, such as the continuous high supply of agricultural products in the market and the oil price fall in the international markets. The controlled levels of budget expenditure and budget deficit, the preservation of money market stability, the stable lek relative to the other currencies and the proper administration of public expectations related to inflation have all had a positive impact on maintaining price stability.

The developments over the latest months have been characterized by higher monetary expansion rates, resulting from the growth of public sector demand over the recent months. However, credit to economy remains the main constituent of demand for monetary assets. Outstanding credit to the private sector amounted to ALL 165.6 billion in September, accounting for 18.7 per cent of the GDP. Credit to households grew under the most rapid rates, while the share of the lek to total credit continues to grow. The lek exchange rate was influenced by the increase of interest rates in the international markets. The latest months indicate a more diverse performance of the lek, characteristic of which was the absence of appreciating pressures. The Bank of Albania monetary operations have aimed at stabilizing the money market and at enhancing the monetary policy efficiency. In response to the growing demand of both the public and private sector for money, the Bank of Albania has reassessed the direction of operational instruments in the money markets, orienting them towards the injection of liquidity in the system over October.

The Bank of Albania assesses that the overall macroeconomic environment is favourable for maintaining price stability over 2007 and on. Despite the relative consumer prices stability, the analysis of the latest economic and monetary factors evidences that the balance of risks has shifted upward, bearing the possibility of inflation deviation from the desired trajectory. Therefore, it is necessary to take prudent measures for preserving this environment.

As we have already communicated to the public in our previous analyses, these factors would be summarized in:

• Performance of domestic demand. The rapid growth of credit to economy over the last two years has created the grounds for the quick revival of domestic demand in economy. Despite the slow growth rate in the last two or three months, it remains high. This effect becomes more evident under the rapid development of consumer loan. The moderation of the growth rate of credit to economy is not final yet, despite the regulative measures recently issued by the Bank of Albania. According to various studies, there is still a high potential of our economy to absorb credit in relation to what has been extended.
  
  This fact is a clear signal indicating that the growth of credit will more or less be in the same levels with the current ones, implying that the pressures on domestic demand will be present. Moreover, worth mentioning is that, in line with the Government's plans to increase domestic financing in the projected quota, domestic demand will be also supplied by the concentration of consumption and public investment.
  
  In this context, it is assessed that today's decision of the Bank of Albania Supervisory Council aims at absorbing the added pressures in the future, which may be generated by domestic demand in economy.
• Performance of agricultural prices. This factor has influenced on the moderation of total inflation over the last two years. Such a performance has, among others, been supported by the growth of domestic production and the enhancement of competition in the agricultural production market. The most recent data on the performance of agricultural prices provide signals for a downward shifting of agricultural prices, reflecting the prices performance of foodstuffs in partner countries, as well.
• Monetary developments and the exchange rate. In the presence of a high Government demand for financing, recently there has been a continuous fluctuation of liquidity and interest rates, in particular in the interbank market.
• Moreover, considering the constant narrowing of the spread between the ALL and foreign currency interest rates, the exchange rate performance may be put under the influence of depreciating tendencies. The expectations for another ECB decision by the end 2006 have a negative influence on saving in our domestic currency. Considering that the inflation influence channel (tradeable goods, in particular), as in most import-oriented countries, is too sensitive to shifts in the domestic currency, we assess that this increase will help in establishing a better balance of factors affecting our country's external position.
• The inflationary expectations and the possible secondary effects of energy price rise. The level of economic agents' development in transition economies affects the creation of adaptive inflation expectations, implying that they are overwhelmingly affected by the past and current performance of inflation. Such a characteristic may bring about the shifting of these expectations, even in the presence of short-term inflationary impulses, leading to the extension of the inflationary cycle in economy.

The increase of the core interest rate aims to better control the pressures generated by domestic demand, better accommodate the supply-side fluctuations, stabilize the exchange rate, as well as to make a better orientation of inflationary pressures.

Its reflection in the financial markets and in the money market instruments will establish a more stable balance between the monetary stimulus of the economic activity and the deriving inflationary pressures. Moreover, the increase of the core interest rate aims to preserve the time and foreign currency structure of monetary assets, in line with their historical trends, and to reassess the incentives for maintaining the savings in our domestic currency.

The Bank of Albania will continue to be cautious at all contexts, making its best efforts to ensure that the decisions it makes are in line with the main objective, under a stable