Some of the possible causes and elements characterising the nature and evolution of the crisis that have been advanced by commentators include: (i) the excessive borrowing by financial industry and the private sector due to the prevailing low interest rates; (ii) the build up of financial disequilibria and asset price bubbles; (iii) the biased system of incentives that led investors to excessive risk-taking; (iv) the failure by regulators to adapt to the state of the evolution of the financial system; (v) the market failures related to information asymmetry and lack of transparency about risks and characteristics of the different products; (vi) the existence of obvious conflicts of interests affecting key agents needed in the securitisation process; and (vii) finally, the failure of investors to conduct due diligence, blindly relying on information and models that proved to be inappropriate to capture some very relevant risks. It is probably not very adventurous to say that the bursting of the house price bubble in the US, with the ensuing increase in the default rate and the severe underperformance of the subprime mortgage sector, was the spark that ignited the financial and economic crisis. In the summer of 2007, as highly leveraged investors were forced to unwind some positions to cover margin calls, liquidity in some fixed-income markets dried out completely. Investors found themselves trapped and were forced to sell assets at considerable discounts. In some cases further sales – particularly for subprime Mortgage Backed Securities – were forced by stop-losses and Value-at-Risk based risk budgets.

Inflation’s performance over the recent months was consequent to the balance of two main factors’ opposite actions. On the upward trend, high primary commodity and raw materials prices in world markets were transmitted to the domestic inflation in the form of higher imported inflation. In the short run, this phenomenon also contributed to core inflation, which was up compared with last year. High net inflation rate of non-tradable goods showed that a part of higher commodity prices materialised in second round effects in inflation. Latest developments in inflation affected also the economic agents’ inflation expectation, which, however, remain within the target band of the Bank of Albania. On the downward trend, domestic economy developments continued to provide an environment with contained inflationary pressures. Our assessments on economic activity suggest positive growth rates for the first quarter, although below the potential. Under these circumstances, the Albanian economy continued to be characterised by spare productivity capacities – labour and capital – and negative output gap, continuing to exercise downward pressures on inflation. Similarly, the monetary development analysis confirmed the presence of contained monetary pressures on the domestic economy. Following, I would like to address the economic factors that determined inflation developments and their expected performance. Albania’s economic activity, during the first months of the year, took place in the context of a growing global economy, amid increasing inflation pressures and added uncertainty in financial markets. Global economic activity continued to grow during the first half of 2011, led by rapid expansion of demand in emerging economies.