Clearly, Asian economies have benefited much from such capital inflows, but at the same time they have exposed themselves to the threat of a sudden loss of market confidence and hence large outflows of funds due to policy mistakes or shifts in the international economic environment. This is particularly true if a large proportion of inflows are volatile portfolio investment or short-term borrowing. 24. The next monetary problem concerns current account deficits. A number of Asian economies were able to run larger than normal current account deficits in the balance of payments because they were easily funded by capital inflows. The bad news about large capital inflows is that they might allow investment and even consumption to expand without enduring the pain of overheating or loss of competitiveness. Higher levels of domestic credit, consumption, investment, growth and even budget revenues can be sustained at the cost of rapid accumulation of foreign debt. To make matters worse, over 80% of the current account deficits of selected Asian economies was funded from short-term bank debt. In hindsight, the ready availability of short-term external financing might have delayed the necessary policy adjustments in face of cyclical and structural changes in the domestic and international economic environment. In short, we can all easily make the mistake of taking capital inflows for granted. 25. Then there is asset price inflation which is a rather common consequence of capital inflows. In an open economic environment, capital inflows may not lead to consumer price inflation, since imports would alleviate excess demand.

Financial markets in the first quarter of 2012 were serene, reflecting relatively low premiums of liquidity and inflation risks. The interest rate in the interbank money market has followed swiftly the recent key interest cuts. The transmission of eased monetary policy signals is also observable in the deposits market, while it is expected to be transmitted in the future also in other market segments, conform to the time lag of the transmission mechanism. In the primary market, government security yields showed upward trend reflecting developments in relevant structural factors of the demand and supply, without signalling added risk or inflation premiums. Verified developments insofar, change the basic projections for economic developments in the future. Year 2012 is expected to be influenced by unfavourable developments in the global economy, which may affect the Albanian economy as well. Foreign demand is expected to provide lower contribution over the course of the year, impacted by economic slowdown in our trade partners. Fiscal policy orientation towards further consolidation of fiscal parameters limits the space for a substantial fiscal stimulus to foster the economic activity. Under these circumstances, private domestic demand remains determinant for aggregate demand increase in the future. Overall, analyses suggest a better performance of private consumption and spending, helped also by the eased monetary policy stimulus. Estimates of the Bank of Albania suggest that, in the course of the year, demand growth below the potential of the economy will continue to exercise low inflationary pressures from the demand side.