Monetary Policy Report Q4 - 2013

Economic activity remained weak and inflation pursued a downward tendency in the second half of the year. Official data show that the third-quarter annualised gross domestic product fell by 2.3%. Consumption and investments continued to suffer from low confidence and tight lending terms. Fiscal policy was faced with a high public debt level, restricting the possibilities for macroeconomic stimulus. External environment was characterised by ongoing euro-area problems, hence limiting our export growth and making financial markets pursue conservative lending policies. Annual inflation fluctuated around Bank of Albania’s lower targeted band in the fourth quarter, driven by weak aggregate demand, lower imported inflation and subdued inflation expectations. The Bank of Albania lowered the key interest rate by 0.5 percentage points, to 3.0% in the fourth quarter. This policy managed to keep liquidity premia and inflation in check, contributing to lowering the interest rates in the interbank, government debt securities, lek loan, and deposit markets. Reflecting the weak economic and monetary dynamics in Albania, inflationary pressures are expected to be weak. Four-quarter-ahead inflation is expected to fluctuate between 0.7% and 3.8%, with a 90% probability of occurrence. This requires maintaining a stimulating monetary policy in the medium term.