These beneficial tax regulations have given households an incentive to increase their saving in securities. As households have saved to a greater degree in securities, the conditions for the banks’ funding have also changed. There is indeed a global trend for households to invest in unit trusts and other securities, but in Sweden saving in mutual funds is rather more extensive than in many other countries.3, 4 Although household saving still finances the banks, it now done increasingly indirectly through the securities market, when pension funds and other financial agents, both Swedish and international, invest in the banks’ bonds. This has meant that the number of intermediaries and links between different financial agents has increased. In other words, the system has become more complex. A more integrated financial system Mortgage institutions were for a long time independent of the banks, although there were indirect links in that the banks invested in the mortgage institutions’ bonds. When the credit market was deregulated and liquidity ratios were revoked, these investments were to some extent replaced by direct loans to mortgage institutions. Over the years, the links between mortgage institutions and the banks have continued to strengthen. At the beginning of the 1990s, a number of amendments were made to the regulations, enabling the banks to acquire mortgage institutions. This laid the foundation for the major banking groups we have now. Initially, the mortgage institutions continued to fund their operations with housing bonds, and from 2007 these were gradually replaced by what are known as covered bonds.
Our current econometric models provide us information about these future developments. Our internal studies show now that the Bank of Albania is able to make reliable forecasts. We also discussed the consequences of situations where the consumer price index increases, let us say, more than 3% at an annual basis. This may for instance happen due to higher electricity prices, or higher oil prices. These energy prices are a main share of our daily expenditures. Therefore, they are a main share of the total basket of consumer prices for the “average” Albanian household. However, the focus of our discussions was the analyses of the further impact on the Albanian macro-economy. Higher prices will lead to a lower purchasing power. Households will buy less in case of a price increase, under the condition of unchanged household income. Then, if many households in Albania start consuming less, the Albanian economic growth will suffer. The Albanian production will slow down due to the overall lower demand for goods and services. This process can take some time. But, anyhow, each economist will agree that strong increases in prices are bad for the economy. A high inflation, that is another way of saying a strong increase in prices, will harm economic growth. The Bank of Albania aims at an average increase of the consumer price index of 3%. The Bank of Albania will set the interest rate for keeping expected price increases to 3% plus or minus 1 percentage point.