Concerning the macroeconomic aspect, a number of factors contributed to inflation at this period, with various degrees of intensity and opposite directions of action. Upward inflation pressures were generated mostly by conjunctures of raw material and primary commodity  BIS central bankers’ speeches  1  prices in international markets. Imported inflation was transmitted directly to increased consumer goods prices in Albania. It exercised additional pressures on production costs and inflation expectations, but these second-round effects remained controlled. Furthermore, the negative output gap continued to exercise downward pressures on prices balancing, in part, the effect of foreign price increase. The expansion of economic activity continues to be below the potential of the economy, leaving unutilized capacities in the labour and capital markets. Under these conditions, inflationary pressures from the real sector of the economy remain controlled. This is reflected also on the base inflation performance, which, although upward, remains anchored within the Bank of Albania’s medium term inflation target. Moreover, monetary indicators generated contained inflation pressures, reflecting also a prudent monetary policy of the Bank of Albania. In March, the Supervisory Council of the Bank of Albania decided to increase the key interest rate by 0.25 basis points, to 5.25%. This decision was made in response to added inflation pressures of foreign origin. It aimed at retaining the anchoring of economic agents expectations on inflation and minimising secondround effects. Even after this increase, domestic monetary conditions remained stimulating and provided the economy with the appropriate support at this stage of its development.

The challenge that lies ahead of us is how to include this new objective in our policy making; whether inflation targeting and financial stability can be combined or whether a new regime altogether is needed. Various new radical approaches have been mentioned so far. However, I believe that we should not discard all the hard-learned lessons and the successes of the past. Stabilizing inflation should be something that central bankers may be proud of, something that we should cherish and continue to strive for. Incorporating financial stability objectives with the inflation targeting regime should be seen as an opportunity to understand economic developments and potential macro-financial risks, to achieve both these objectives and preserve long-run economic stability. I believe the course of the monetary policy will continue to be extensively discussed in the future, including our improved understanding of the role of asset prices and financial frictions. Under the current conditions, the largest central banks in developed countries have stretched central banking theory and practice beyond traditional activities. Their balance sheets have increased beyond imagination and, in some cases, include private assets; they have accepted a much broader role and have assumed more responsibility. This all new and untested type of central banking will have a strong impact not only on the nature of monetary policy and its interaction with other central bank objectives but also on the independence and credibility of the central bank itself.