All these considerations allow us to underline the notion that the achievement of financial stability must be based on a broad range of tools which we should all seek to strengthen. Achieving a coherent approach to financial stability may be challenging, if only because it requires a consistent combination of macro and micro elements and because of the large number of interested and participating parties. Also, it should foster financial innovation, and ensure a level playing field. I believe that prudential supervisors should analyse the extent to which conditions are in place so that the banking system can remain resilient in the face of internal and external shocks. This should contribute to the proper functioning of the economy under a wide range of circumstances. Basel II and financial stability That leads me to my third topic, which is a discussion of the impact the new capital framework will have on financial stability. You are probably not surprised to hear that I believe the framework will enhance stability. But let me elaborate on several areas where I believe Basel II will foster stability. Incentives for better risk management First, I believe that Basel II is a major step forward in strengthening the incentives for the ongoing improvement of banks’ risk measurement and management systems. The new capital framework is an incentives-based system and it is a risk-based framework.
To this purpose, alongside the banking system, we are considering the required measures that may lead to the growth of lending in line with the cyclical and structural needs of the economy. Economic and monetary developments elaborated above yielded an environment of contained inflationary pressures. Average annual inflation marked 3.4% in the third quarter. Against a background of below-potential economic growth, and given the absence of monetary-related inflationary pressures, inflation was largely affected by the rise in administered prices. The contribution of the latter’s rise to headline inflation is 1 p.p. In the absence of second-round effects, the effect of the rise in administered prices is expected to be transitory, while the inflationary pressures arising from domestic demand remain well contained. On the other hand, the depreciation of the national currency has been declining, hence offsetting the rise of primary commodity prices in the world markets and the increase of inflation in Albania’s main trading partners. The absence of inflationary pressures in the medium run and the contained fiscal policy provided room for pursuing a stimulating monetary policy that sustains economic activity. In July, the Supervisory Council of the Bank of Albania cut the key interest rate by 0.25 p.p. bringing it to the historical low of 5.00%. In addition, the Bank of Albania continued to supply the banking system with the required liquidity in order to ensure the smooth operation of the money markets and to enhance financial intermediation in economy.