The nature of future monetary policy will largely depend on the success of the largest central banks to get out of this situation in a controlled and timely manner, without causing excess inflation and damaging central banks hard-earned credibility. These developments will affect monetary policy in the emerging markets through interest and exchange rates, but most importantly in the way central banks conduct their monetary policy. Influenced by current practices of leading central banks, some other central banks have reoriented their objectives and engaged in activities which are traditional for development banks and governments. We have been careful to stay away from adopting and targeting such objectives not only in monetary policy but also in our macro-prudential policy. The Bank of Albania has traditionally based its policy on two important pillars. Our first focus has been to achieve our inflation target and manage inflation expectations to preserve the purchasing power of our currency. This policy has simultaneously provided necessary stimulus to economic activity. Second, our focus on banking supervision and financial stability has enhanced the confidence on our financial system and therefore increased the efficiency and credibility of our monetary policy. As I have said in April of 2008, during the annual conference with the banking system in Albania, “every investment we make today in financial stability yields increased efficiency in our monetary policy”. 2  BIS central bankers’ speeches  Recently, the Bank of Albania has introduced financial literacy as a third pillar of our policy and independence.
You have implied that higher interest rates were necessary to defend the exchange rate. Has the recent declining trend in the Bank’s external reserves been mostly due to the premature conversion of Maltese lira to euro? With an open capital account and the growing integration of the Maltese financial system with that of the EU it is becoming increasingly difficult to clearly identify the impact of the different factors affecting movements in the external reserves. Some factors, moreover, are interest sensitive, others less so and yet others not at all. 2  BIS Review 59/2007  One major factor belonging to the latter category that has exerted downward pressure on the reserves since the latter part of 2006 has been the improved prospect of euro adoption in 2008. This has induced some firms and individuals who receive foreign income denominated in euro not to convert such income into domestic currency. Others are converting their Maltese lira deposits into euro deposits. In addition, holders of Maltese lira assets, particularly cash, have been buying up euro currency notes. It is significant that since the external reserves started to decrease in November, currency notes in circulation have declined by about Lm35 million, almost entirely in the form of Lm10 and Lm20 notes, the preferred medium for cash hoarding. At the same time, the importation of euro notes, mainly high denomination notes, has increased. Movements in the external reserves are also influenced by the performance of the current account of the balance of payments.