House prices increased further this summer, and the twelve-month rise moved up to 17.7 per cent in August. Residential construction is still high. In 2005, the number of housing starts was the highest since the beginning of the 1980s. As the interest rate level gradually normalises, household interest expenses will increase. Combined with projected lower employment growth and higher inflation, this might reduce growth in household purchasing power in the years ahead. Higher wage growth would have the opposite effect. Overall, moderate growth in household purchasing power is expected to result in lower consumption growth ahead. A gradual increase in the interest rate will probably curb activity in the housing market. Housing investment is expected to grow through this year, albeit less rapidly than last year. Housing investment growth will thereafter moderate further, and may fall somewhat towards the end of the projection period. House price inflation is expected to slow. Household indebtedness has increased in tandem with high activity in the housing market. Growth in household debt (C2) has abated somewhat in recent months, but remains at a high level. Higher interest rates and lower house price inflation will gradually reduce household debt growth in the next few years. Growth in credit to mainland enterprises has also shown a sharp increase over the past year, partly reflecting increased fixed investment. With prospects of continued high capacity utilisation in the Norwegian economy, solid profitability, ample liquidity and a high level of optimism among enterprises, strong growth in investment is expected again this year.

Money demand was affected by a moderate upward private sector demand for funding. Lending to private sector increased by 12.5% in July, triggered by the relatively stable increase of lending to private businesses and resurgence of lending to households. Although the banking system has eased lending standards, the Bank of Albania deems that there is still room for further easing, especially as regards credit for private investments. Developments in financial markets indicate downward risk premiums and liquidity. In the interbank market, trade volume expanded further and interest rates dropped, remaining close to the key rate and displaying low volatility. Moderate government demand for funding is reflected in refrained upward trend of government bill yields in the primary market. Additionally, the yields trend retained its trajectory, showing low inflation expectations by financial market agents. At the end of H1 2011, the situation of the financial system and banking sector was stable. The banking sector, expanded its activity and broadened its share in the country’s economy. Liquidity situation is good while the deposits by the public increased at satisfactory rates; they cover more than once the value of credits and borrowing from non-residents is low. Data indicate that lending growth rate is improving, but the credit portfolio quality continued to drop. The banking sector retains stable growth rates of net interests revenue and gross operational profit. However, tightened capital requirement to cover credit risk, led to lower net financial results of the banking sector compared to a year earlier. However, financial performance continues to be positive and concentrated.