That led in December 2005, and in March and June 2006, to respective quarterpoint rises in official interest rates from the historically low level of 2% at which they had held since  BIS Review 60/2006  3  June 2003. Despite these rises in official rates, the Eurosystem's monetary policy stance has remained propitious to the firming of the pick-up in activity and job creation. Nonetheless, the ECB is closely monitoring developments in the euro area to ensure inflation expectations remain in line with price stability over the medium term. Budgetary policies adopted a moderately contractionary stance in the area as a whole, although the persistent fiscal imbalances in several Member States continued. Consequently, the current firming of higher growth rates should drive more resolute action to correct these imbalances, the persistence of which may, in some Member States, have dented agents' confidence and may thus affect their spending decisions. The reform of the Stability Pact appears to have successfully concluded a phase of uncertainty over the application of regulations relating to the fiscal policy discipline of the euro area countries. However, preserving the credibility of the new framework requires an unequivocal and ongoing commitment by the national authorities to strict compliance with the Pact. The recent persistence of sluggish growth rates, despite highly favourable financial conditions, highlights the pressing need to see through the European structural reform agenda with firmer resolve. The revision of the Lisbon strategy in 2005 may contribute to driving this process.

Against this background, 2005 was marked by the continuing strong growth of financing to the resident private sector, especially the financing of activities linked to the property market. Nonetheless, the change in the monetary policy stance and the increased volatility of financial markets in recent weeks have renewed doubts about the continuity of this setting. The growth of mortgage credit has been accompanied by the emergence of new bank products. It has thus been possible recently to observe a lengthening of the terms at which mortgages are granted, to limits considerably in excess of those banks are accustomed to handling, and greater flexibility in the deferral of principal and interest payments, as well as the possibility of being able to draw automatically on amounts repaid in order to finance other needs. These financial innovations, which are characteristic of mature financial markets, enable financial institutions to satisfy customer requirements with greater flexibility, and the possibilities of financing individuals and firms may be increased. However, substantial extra efforts are required by bank managers to properly measure and control the additional factors of risk and also to provide customers with the necessary information so that they may assess their ability to pay under various alternative scenarios. The increase in financing granted to property market-related activities is not confined to that extended to households for house purchases; financing extended to construction and property development companies has also grown notably. The degree of concentration of entities' credit portfolios in construction and property development activities increased once again in 2005.