But which options will we have as regards exchange rate policy when the Monetary Union has come into existence? Theoretically the options are: 1) the current system; 2) a floating exchange rate; 3) a unilateral link with the euro; 4) a bilateral link with the euro; BIS Review 42/1998  -9-  and 5) introducing the euro as legal tender in Iceland. This list does not include membership of the Monetary Union, as that is only available to members of the European Union. Three factors need to be considered when weighing these options: first, the success they will produce in terms of low inflation and economic stability; second, how likely are they to narrow interest rate differentials vis-à-vis abroad; and, third, the flexibility they offer in case of external shocks, whether positive or negative. The current arrangement calls for the maintenance of a trade-weighted exchange rate index within 6 percent on either side of a central rate. The arrival of the euro will not prevent the continuation of this arrangement. The euro would be assigned a weight in the currency basket consistent with the Monetary Union members’ share of Iceland’s external trade. This approach will, however, not yield any progress towards narrowing interest rate differentials vis-à-vis those abroad beyond the growing credibility that economic stability will achieve on its own in due course.
Increase in consumption and private investments, owing to the improved financing terms, confidence and private sector balance sheets, was, and is expected to continue to be, the main driver of the economy’s performance. On the other hand, the public sector has been and remains committed in the path to fiscal consolidation, whereas the external environment continues to face problems and pose challenges to the increase of Albanian exports. In the short run, the increase in consumption and private investments is sufficient to generate initial triggers for economic growth, but the long-term growth of the Albanian economy should rely more on the improvement of its competitive profile and growth of exports. Therefore, we deem that the acceleration of structural reforms has a unique role in supporting economic growth. Inflation continued to stand below our target. Internal inflationary pressures have been upward, but the fall in prices in global markets decelerated the return of inflation to target at home. The monetary policy stance of the Bank of Albania has become strongly accommodative. This policy stance aims at reducing the financing costs of the private sector, in order to sustain the return of the economy to equilibrium and of inflation to target, in the medium-term horizon. In our view, the indicators of economic activity and inflation are performing in the right direction; however, the sustainable accomplishment of targets will need time and will imply keeping low interest rates for some quarters ahead. Overall, the main indicators in banking system activity improved.