In parallel, given the elevated uncertainties across financial markets - which faced an increase in interest rates for the first time in more than a decade – we have intensified communication with markets and the public, to clarify our strategy of monetary policy. This strategy is based on three important principles:  First, normalisation of monetary policy stance was and remains necessary for inflation to return to the target in a steady manner. The purpose of this normalisation was to curb the pass-through of rising international prices to the general, steady surge in prices in the Albanian economy. In this context, this normalisation was in line with the reaction undertaken by all other central banks in the course of 2022, and in the current year. Second, the speed and intensity of normalisation has followed a gradual and prudential process, led by new information and in harmony with the direction of fiscal policy, as well as with developments in the financial market. In this view, I would like to highlight that our monetary policy stance has been - on the one hand  2/8  BIS - Central bankers' speeches  - consistent with the return of inflation to the target, and - on the other hand – prudential, in order to have the least possible effect on both economic activity and financial stability.
Second it showed up the limitations of the models which underpin the valuation and rating of structured products and the excessive weight that had been given to them not just by the naive or unwary, but by some of the most sophisticated players in financial markets (including many of the sponsoring banks who underestimated the risks they were running in retaining super senior tranches). Third, it illuminated the adverse incentives that had been allowed to develop in the distribution chain for credit products including the strong incentives for originators to put quantity above quality, for the rating agencies to expand their scope as widely as possible, and for banks to use off-balance-sheet vehicles to finance structured credits. It may also reveal some flaws in the compensation schemes in banks. In some cases these incentives arose despite regulation, in others they were the consequence of faults in the regulatory system. Finally it showed again how measures of risk used by companies and regulators can be pro-cyclical, encouraging more risk taking at the top of the cycle and potentially exacerbating the downswing. In the last few weeks, markets have been calmer. Liquidity pressures in short-term funding markets have eased, helped in part by the co-ordinated action by central banks to address elevated funding rates over the year end (Chart 3). And, as losses have been declared it has proved possible for a number of firms such as UBS, Merrill Lynch and Citigroup to attract new capital including from Sovereign Wealth Funds.