After recovering in the last quarter of 2011, private consumption slowed down in the first quarter of 2012. The performance of imports of consumer goods and the low annual growth of VAT revenues suggest sluggish consumer demand over the quarter under review. This assessment is also supported by qualitative data obtained from consumer, business and banking sector surveys. The dynamic of quantitative and qualitative indicators also suggests a sluggish performance of investment. BIS central bankers’ speeches  1  Against a background of low demand and spare production capacities, and in the presence of uncertainties for the developments at home and abroad, businesses have postponed their new investment-related decisions. In addition, the contribution of public investment to aggregate demand growth was negative in the first quarter of 2012. The Government pursued a prudent fiscal policy in the first four months of the present year, translated into the annual reduction of the budget deficit by 28% during this period. Budget revenues continue to record moderate annual growth rates, reflecting the performance of economic activity and providing evidence for the mutual impact between the public and private sector dynamics. The Bank of Albania, however, points out that pursuing a fiscal policy oriented toward the long-term sustainability of budget and public debt figures will provide clear medium- and long-term benefits to the Albanian economy, in the form of lower risk premiums, greater room for private sector financing and, ultimately, lower financing costs. This policy is also in line with the developments in domestic and foreign financial markets.

The other key element of the capital and liquidity regime to be agreed is the Net Stable Funding Ratio. This standard addresses banks longer-term liquidity risks. Proposals are currently out for consultation and the Basel Committee aims to agree the standard in September this year. Concerns have been raised by some in the industry that taken together, the main elements of the new capital and liquidity regime can interact to have potentially serious and unwelcome unintended consequences particularly on market liquidity. The official sector takes such concerns seriously and is already looking closely at them. We should not however set the objective of ensuring a return to pre-crisis liquidity conditions. Liquidity premia were likely too low with liquidity risk very probably under-priced before the crisis. Prior to the crisis, market-makers were permitted to fund their inventory with dangerously high levels of leverage, funded at very short-maturities. Though lax standards allowed dealers to carry high levels of inventory and to easily accommodate shifts in the demand for market making, dealers were vulnerable to falls in asset prices and tightening in  4  BIS central bankers’ speeches  wholesale markets conditions. When faced with severe stress, they were forced to withdraw from market making altogether. With regulation tighter, it may be harder for dealers to absorb inventory when end investors wish to offload assets; market liquidity may start to fall away at an earlier point. Market participants will need to recognise this change in market structure and adjust their balance sheets accordingly.