PRESS RELEASE
Complimentary speech of the Bank of Albania Governor, Mr. Ardian Fullani, addressed at the Workshop Monetary Policy Issues and Inflation Forecasting, held at Tirana International Hotel on January 26, 2005

Dear colleagues,

It is a great pleasure to me to share with you some thoughts in this meeting on monetary policy and the inflation forecasting process at central banks, and the Bank of Albania in particular.

In the developed countries low inflation has become a main objective of central banks. They try to maintain price stability through implementing a monetary policy based on various regimes. The monetary policy conduct is thereby a forward looking process, irrespective of their regime. This implies that it takes some time before monetary policy decisions affect the level of prices in the economy. For this reason, inflation forecasting is an important task for central banks in conducting monetary policy.

While a lot of progress has been made in terms of both theoretical and econometric models in the last decade, inflation forecasting still remains a difficult task that requires continuous efforts. We are living in a quickly changing world where many shocks hit our economy. This makes the task of inflation forecasting even more difficult. The ambiguous and changing economic structure of Emerging markets like Albania further even complicates this task.

Our current forecasting methods at the Bank of Albania are based on small non-structural models. Although they do not include all the economy links, due to some serious restrictions and data series being not yet fully reliable, their performance has been rather satisfactory. This has been partially reflected as well in the good results of monetary policy achieved in the recent years. Meanwhile, to gain more time in the process, intense work is in progress to build even more complex structural models on inflation forecasting that would better meet the current developments and expectations of the economy. To this end, the Bank of Albania is being assisted by IMF experts, whom I warmly welcome today here - Prof. David Mayes and Ms. Marga Peeters - together with our colleagues from Turkey, Monte Negro and Kosovo.

As already said, Albania has shown impressive results in terms of price stability. Inflation has been distinguished generally by lower rates in Albania relative to other transition economies, and not too far from inflation rate of the euro area countries. However, there have been cases where inflation has unavoidably diverged from our target due to unforeseen shocks and other factors that generally were beyond the central bank's control.

The Bank of Albania aims at keeping inflation low. Pursuing this goal successfully will require a lot of efforts to overcome the obstacles that may stand in our way, without penalizing the economic growth. Among the issues that require a particular attention I would highlight: the warmth of the economy as a result of the progress of structural reforms, the fluctuations in the emigrants' remittances and their implication on exchange rate volatility, financial system developments, etc.

Concerning these issues, we may emphasize that the whole banking system is now under private management. This is expected to boost banking competition, improve service quality, and deepen the channeling of banking credit in the economy. All these factors will contribute towards a sounder banking system. Meanwhile, the Bank of Albania carefully follows and analyses the implication of these developments in the banking system reaction to monetary policy decisions. Also, these developments require a particular attention on further improving the Bank of Albania supervisory capacity and regulatory framework.

The Bank of Albania is committed to go ahead with additional structural reforms to enhance banking sector intermediation and financial services provision. In close consultation with commercial banks, governmental institutions, and the private sector, the Bank of Albania just developed a strategy for increasing the use of the banking system in the regular conduct of business in the framework of cash reduction in the economy.

Returning to the topics of this workshop, I want to stress that inflation forecasting is an important condition even for the monetary policy transparency, which helps in improving the effectiveness of transmission mechanism and increasing the accountability of an independent central bank. Given their high importance, I am committed to encourage these kinds of events. Bringing together experts from neighboring countries and broader is essential to improve our professional skills and better conducting the monetary policy.

Let me conclude. Thank you for being here with us. I sincerely hope that the workshop will be a success, both for a closer regional cooperation and for fruitful discussions on sound monetary policies.

I now have the pleasure of declaring this workshop open.