BANK OF ALBANIA STATEMENTS
The Bank of Albania Supervisory Council Decision on cutting the base interest rate by 0.25 per cent

The Bank of Albania Supervisory Council, in its meeting held on June 23, 2004, decided to smoothly cut the base interest rate by 0.25 percentage points. In this way, the weekly Redemption Agreement Rate (Repo) of 6 per cent dropped to 5.75 per cent, reaching the lowest historical level ever known before.

The decision was principally based on: inflation performance during recent months when the annual rate in May reached 2.6 per cent; the latest data of the Ministry of Agriculture for June, when a more pronounced decline was noticed in the prices of foodstuffs in general and of agricultural products in particular; and on the Bank of Albania forecasts on inflation by the end of the year, which is expected to be within the 2-4 per cent targeted range.

The analysis of monetary conditions indicates that the real interest rates have been in positive terms due to low inflation. This had an impact on the withdrawal of cash in the system, leading to a continuous decrease of currency outside banks during 2003-2004. The ratio of currency outside banks vis-à-vis M3 monetary aggregate remains at minimum historical levels, making thus the annual rate of the change of monetary base and M1 monetary aggregate be in negative terms and much below their trends.

According to first indications, 2004 has been a favorable year for agricultural production, particularly for greenhouse products, which have raised the supply by bringing about a rapid decline in the prices of these products in the market. On the other hand, the entry of domestic products seems to have leaded indeed to a reduction of imports for these goods, making the foreign currency demand be noticeably lower. Meanwhile, the commencing of season's effects, as it has become traditional even in the past years, has further raised the foreign currency supply in the domestic market.

Such developments, under the conditions of a still-considerable difference between the interest rates in lek and those in foreign currency, make the pressures on the domestic currency be strong in terms of its appreciation, a fact that is recently reflected in the performance of the exchange rate of euro and American dollar against lek. As it has already been announced even previously, it is deemed that the lek appreciation may discourage the Albanian exporters, particularly the agricultural producers.

Notwithstanding the optimistic performance of credit to economy, it seems to consider no sensible effects on money supply and this reflects, above all, a moderate fiscal policy. It is to be stressed that incomes from the Savings Bank's privatization have given positive effects on the budget, whereas the performance of expenditures over the 6-months period of the year will be carefully examined.

To sum up, it should be noted that testing a lower difference of interest rates between lek and foreign currency will help avoiding negative effects on inflation that may be brought about by a possible depreciation of lek, in consequence of a cycle of interest rates increase expected to be initiated by the monetary authorities of the USA and Europe.

However, the Bank of Albania will follow up the further developments of main economic indicators with keen interest, keeping open all the possible positions for the future, having as the ultimate goal the maintenance of price stability.