The economic situation in Norway was more favourable compared with the international trend for a long period, and wage growth was surprisingly high in 2002. As a result, the interest rate differential against other countries was high. This had an impact on exchange rate developments. In addition, special factors in the global economy led to a stronger krone than might have been expected from the higher interest rate differential alone. Themes in foreign exchange markets shift. In periods, investor focus on stock returns feeds through to exchange rate movements. During periods of political and economic unrest, investors may choose individual currencies as a safe haven. In autumn 2002, the Norwegian krone was probably also perceived as a safe haven. Over the past 18 months, developments in the interest rate differential between Norway and other countries appear to have had a particularly marked impact on our currency. Norwegian interest rates have been pushed down towards the level prevailing abroad. Through 2003, the interest rate differential has narrowed as a result of monetary policy easing. The interest rate has been reduced by 5¼ percentage points and is now approximately the same as among our trading partners. Through 2003 and up to March 2004, the krone depreciated by about 15 per cent, measured by the import-weighted index I-44. Since the monetary policy meeting on March, the krone has appreciated again by about 3½ per cent. Inflation has edged up, but is still low. In March, inflation stood at 0.3 per cent.
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.