In these situations of moderate and fundamental-driven capital flows, the prevention of financial vulnerabilities resulting from exchange rate volatility should be addressed through financial regulation and financial development. In fact, this has been the case of Chile, where the regulation of currency mismatches has prevented banks from excessive risk taking, and the deepening of the financial system has provided an increasing hedging capacity of the private sector. Nonetheless, this approach is not free of situations like those experienced in some emerging market economies like Mexico, Brazil and South Korea after the Lehmann bankruptcy, where the un-regulated corporate sector became systemically important after the misuse of hedge instruments increased dramatically their exposure to exchange-rate risk. In this regard, strict rules for addressing excessive risktaking from financial intermediaries that fund these positions should be implemented. On the other hand, when a country is subject to a sudden surge of capital inflows due to the incentives associated with temporary macroeconomic and financial conditions, or due to sudden changes in the international investors’ portfolio decisions, the inflation-targeting framework may be subject to important challenges. These challenges are particularly important when episodes of capital flows also result in inflationary pressures. Under these circumstances, dealing with inflationary risk through interest-rate policy may generate further incentives for capitals inflows, exacerbating exchange rate volatility and even creating an over-appreciated currency. From the point of view of macroeconomic policies, this requires to ensure that fiscal policy is not what is inducing capital inflows.

Inflationary pressure stability is clearly illustrated by low rates of core inflation of non-tradable goods one during this period, being reflected also in checked expectations of economic agents of the market. Meanwhile, after a long non-inflationary period and confirming Bank of Albania forecasts, the annual change of consumer prices revealed a slightly increasing tendency over the second quarter of 2009. The annual inflation marked 2.3 percent in June, reflecting a more complete pass-through of exchange rate deprecation effect on consumer goods prices. The Bank of Albania estimates that this factor may play a higher role in the future for determining these prices, comprising premises for short-term and medium-term shocks on price level. In the face of these developments, the Albanian economy continued to be featured by low public and private savings rates even during the first half of 2009, associated with further enlargement of current account deficit and upward pressures on exchange rate performance. Simultaneous reduction of exports and imports, respectively by 19.6 and 6.3 percent on annual level, made the trade deficit contract by 1.3 percent during first five months of the year. However, reduction of emigrants’ remittances by about 8 percent during the first quarter and the service account deterioration, made the current account deficit record an annual growth of 5 percentage points of GDP during this quarter. Though this deficit goes for financing, to a large extent, the capital and intermediate goods of import, its sustainability deserves a greater attention.