In the first half of the year, inflation remained low due to weak demand-side pressures and anchored inflation expectations. The latter reflect Bank of Albania’s prudential monetary policy. This policy has enabled the long-term interest rate cut and has contributed to maintaining the banking system soundness parameters. Also, Albania’s improved external position, together with the national currency’s stability and financial sector’s overall sound balances, have further strengthened the financial stability and ensured one of the pillars necessary for its long-term development. The second-quarter inflation turned out 2.2%, a lower rate than in the first quarter. Lower agricultural product inflation and steady prices for other CPI basket items shifted this quarter’s inflation down. Agricultural price inflation accounted for about 90% of the headline inflation, reflecting both the price volatility of agricultural products and their relatively high share in the CPI basket. From the macroeconomic perspective, the presence of spare productive capacity continues to determine the inflation performance. The sluggish growth of aggregate demand is associated with low increase in investments, employment, wages and labour costs in the economy. This chain of factors is further translated into weak pressures for consumer price rise. It is also confirmed by the record low rates of core inflation over this period. On the supply side, the low price rise in the domestic market has reflected the price stability in global markets and economic agents’ anchored inflation expectations. With regard to economic developments, INSTAT data show that the first-quarter economic growth was 1.7%, remaining similar to the previous year’s figure.

But the more important question remains whether the institutional framework for overseeing financial markets, seeking to prevent crises and, when prevention fails, to manage them, is adequate. Open financial markets will always be prone to bouts of irrational exuberance, but do we do enough to contain the collateral damage which excessive volatility can cause? Some academics, notably John Eatwell at Cambridge, argue that we need a fundamental recasting of the international financial institutions. He favours the creation of World Financial Authority charged with setting the regulatory framework for financial markets across the globe, and endowed with powers of intervention when crisis threatens. His arguments are persuasive, but it seems unlikely that countries will be prepared to cede sovereignty to such an authority on a scale which would be necessary to make it work effectively. There have been many other less ambitious proposals, both from within the IMF and the World Bank, and from individual countries. For a time it seemed as though the creative departments of every  BIS Review 25/2003  1  Finance Ministry in the world – if that is not an oxymoron – were engaged in a kind of architectural competition to draw up a new set of relationships between the international financial institutions, their member countries, and the key regulatory organisations in the financial sector. On the face of it, the changes made as a result of this frenzy of creativity have been very modest. No major new institutions have been set up.