The prospects for the future show that the Albanian economy is expected to operate below its potential even in the medium-term, putting downward pressures on inflation. As I highlighted earlier, in 2010, the Bank of Albania’s monetary policy was implemented in a macroeconomic environment with positive growth rates, contained inflationary pressures and anchored inflation expectations. This environment led to retaining the stimulating monetary policy stance that has been conducted since 2009. It triggered downward interest rates and completed even further the stimulating effects from the exchange rate depreciation. BIS central bankers’ speeches  3  Low interest rates favoured rise in domestic consumption and investments, whereas the depreciated exchange rate supported growth in Albanian exports. Reduction of the fiscal stimulus in 2010 H2 expanded the space for monetary policy conduct. In July 2010, the Bank of Albania lowered the key interest rate by 0.25 percentage points, to its historic low of 5.0%. Improvement of banking system liquidity condition and weak public sector demand for money supported the transmission of an easing policy to all segments of the financial markets in the last months of 2010. In parallel, the Bank of Albania supplied the financial market with the required liquidity to support financial intermediation. Aiming at adopting the most advanced models of central banking, and particularly, convergence with Euro-system practices, the Bank of Albania changed the form of its operational objective. Since June 2010, our liquidity management operations are oriented to targeting short-term interbank interest rates and minimizing their volatility.

Supervisors should also stand ready to act if bubbles like phenomena appear in some markets. For emerging economies, measures aimed at stabilizing capital inflows may help and relieve the pressure on domestic financial conditions and prevent further asset bubbles. International financial architecture In the longer run, however, we may need to work together towards a more efficient and stable international financial architecture. Let me highlight three possible avenues for progress. First, we have to find ways of dealing with international capital flows volatility. For one given country, capital controls may temporarily reduce the pressure on its capital account or even permanently limit the volatility of its exchange rate. For the whole international system, however, they may simply displace the pressure to other countries or asset classes and exacerbate, rather than reduce, overall volatility. There might be ways to eliminate those  2  BIS Review 160/2010  negative effects by creating a predictable framework defining the circumstances, modalities and conditions through which temporary controls would be implemented. Second, there would be benefits in finding ways to disconnect reserve accumulation from exchange rate management and, more generally, from balance of payment situations and monetary policies. At present, reserve accumulation can only occur through a conjunction of balance of payment surplus and some degree of exchange rate intervention. Emerging countries have increased their foreign exchange reserves from 4 percent of GDP in 1990 to over 20 percent on average today.