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

Good morning!

In this communication with media, with you, with the financial market, with businesses, consumers and all other economic agents, I would like to inform you about today's decision of the Supervisory Council of the Bank of Albania on raising the key interest rate by 0.25 percentage point.

In today's meeting, large discussions took place on the latest developments in consumer prices and on economic and monetary indicators. This meeting was a further elaboration of previous analyses of the Bank of Albania, confirming our conclusions about the performance of economic activity and inflationary pressures.

In a summarised way, there was drawn the conclusion that the overall macroeconomic objectives are within the limits envisaged in the country's economic development program. The Bank of Albania has assessed that the economic activity is stable. The overall environment over the first half of the year has turned out non-inflationary, with an annual rate fluctuating on average around 2-2.5 percent. Monetary developments have reflected an increasing activity as concerns the credit to the economy, while the fiscal activity has not performed according to the plan. As in the previous year, during the first 6 months of 2007 surplus is characterising the fiscal budget, reflecting mainly the low degree of capital expenditure realization. On the other hand, trade deficit has recorded an obvious enlargement during the first quarter of the year, generating premises for creating imbalances in the external sector of the economy.

Financial market has been characterised by a higher activity in all its segments. After the stabilization of banking system liquidity at the beginning of the second quarter of the year, the market interest rates have evidenced an upward trend, materializing, to a satisfactory extent, the earliest decisions of Bank of Albania monetary policy.

The exchange rate, which was characterised by a depreciating trend in the first half of the year, has recorded a more stabilised performance in the second quarter, responding to seasonal factors, international market developments and performance of monetary conditions in the country. In the meantime, through the increasing integration of Albanian financial markets, the policies followed by the European Central Bank and the Federal Reserve have been also reflected in the domestic foreign exchange market. These developments convey larger implications for other indicators of the financial system, for the economic activity and for monetary policy.
Expected developments in the economy, forecasts of the Bank of Albania's staff on inflationary developments in 12 coming months and potential risks, whose materialisation would have a reverse impact on inflation deviation from the 3 percent target of the Bank of Albania, were primary issues of discussions.

The Supervisory Council analysed prudentially the following risks:

• Growth of domestic demand, due to high lending pace and monetary conditions that have a stimulating character. The expected growth of budget expenditures and domestic borrowing in the second half of the year is an additional factor in this regard. The growth of the economy demand for goods and services is manifested in stronger inflationary pressures and in imbalances in the external sector of the economy, through expansion of trade deficit and pressures on the exchange rate. Both these forms of disequilibrium are damaging to the perspective of a stable economic growth in the long run.
• Rapid money supply growth, which is a premise for the emergence and constancy of inflationary pressures.
• Monetary policy tightening at global level and its implications for the monetary conditions in Albania.
• Expected growth of administered prices and high raw material prices at world level.
• The need for maintaining inflationary pressures anchored to the Bank of Albania target, as a precondition for a successful and effective monetary policy.

After dealing analytically with each risk element, the Supervisory Council of the Bank of Albania drew the conclusion that the materialisation of some factors has been consumed, while a real possibility of occurrence exists for some others. Against this background, the Supervisory Council of the Bank of Albania decided to raise the key interest rate by 0.25 percentage point, leading it to 5.75 percent. The Supervisory Council of the Bank of Albania deems that the latest decision is a movement in fulfilling the legal mandate of the Bank of Albania, which is the maintaining of price stability. This decision carries over a modern decision-making physiognomy: that of minimising the materialisation of risks in the future.

The interest rate rise is aimed at re-dimensioning the monetary conditions in the economy, bringing them in line with the target of maintaining price stability in the coming months. It will contribute to controlling domestic demand of the economy, revaluating monetary incentives for consumption and savings. It will also help contain the high growth of monetary assets in the economy. This signal expresses the Bank of Albania's willingness to keep inflationary pressures under control. Finally, the Bank of Albania highlights that, in its opinion, the monetary conditions still remain on the accommodating side of the economic growth.

Thank you for your attention