fed was not expected to bring demand back into balance with supply, then inflation expectations would be much less likely to remain stable. this is why i believe that the federal reserve must remain vigilant on inflation but give appropriate attention to keeping demand from falling below supply as well. what does this all mean for the inflation outlook? at present, labor and product markets appear to be in reasonable balance. and i would expect the pressures on inflation that we have experienced from food and energy prices to abate. accordingly, with inflation expectations remaining stable around their current level, i see inflation as remaining in alignment with long - run expectations at around a 2 percent pace for the pce deflator. in addition, i believe that the risks to the inflation outlook have become more balanced, given the greater downside risks to real growth. let me shift gears and discuss developments in financial markets. as you know, the recent turmoil had its beginnings in the subprime mortgage market. 4 the development of the subprime market in the 1990s was an important financial innovation that enabled borrowers with higher credit risk to obtain mortgages that previously were unavailable to them. this expansion appears likely to have been a significant factor in raising the rate of homeownership from 64 percent, the level in 1994, to about 68 percent currently. in addition, subprime and other nonprime lending played an important role in the high volume of home sales in the mid - 2000s. indeed, data collected under the home mortgage disclosure act indicate that about 25 percent of the loans used to purchase single - family, owner - occupied homes in 2005 were high - priced loans, including primarily subprime and some near - prime mortgages. 5 however, as has been the case in previous instances of rapid financial innovations, adequate mechanisms to control excessive risk - taking may not have been in place during the subprime market ’ s greatest growth. one innovation, further development of securitized products, gave mortgage lenders greater access to the capital markets and spread risks more broadly. however, securitization also widened the separation of the originators from the ultimate holders of the loans – that is, those who bought securities backed by loans. in this setup, a classic principal - agent problem can arise if originators ( the agents ) do not have a sufficient incentive to shield the owners of the securities ( the principals ) from suffering higher - than - expected losses. against a backdrop of continued strong investor demand for high -

indicator analysis. in june, annual growth of m3 aggregate was 11. 8 %, around average rates of the past 12 months. our assessments show that the expansion of monetary supply is in line with the performance of the economy ’ s demand for monetary assets. in june and throughout the second quarter, the public sector demand for funding was high, in line with the intensity of the fiscal activity during that period of the year. furthermore, the private sector demand for funding continued to be moderate. lending to private sector posted annual growth of 11. 6 % in june, in line with the second quarter ’ s performance. financial markets are characterised by a serene environment with contained risk premia. interbank market experienced increased trade volume ; interest rates were close to the key rate and had low volatility. in the primary market, government ’ s demand for funding is reflected in the increased yields of government securities. however, the trajectory of yields retained its trend, showing low inflation expectations by market agents. as regards the economy ’ s performance outlook, our projections and assessments suggest a continuation of economic growth, in terms relative to those of the first quarter. composition of aggregate demand is expected to be different to the one of the first half of the year : private sector of the economy is expected to be more vivacious in the second half, while the contribution of the public and external sectors are expected to be more moderate. size and speed of the private sector recovery shall define the stability of economic growth in the future. in spite of assessments for increased aggregate demand, economic activity in albania is expected to remain below its potential, thus conditioning the continuation of spare bis central bankers ’ speeches capacities in the economy in the period ahead. subsequently, inflationary pressures originating from the aggregate demand are expected to be contained. in addition, foreign prices effect is expected to be more moderate in the upcoming months while inflation expectations of economic agents continue to be within the target band. consumer price inflation is expected to continue its downward trend in the next months, gradually approaching the bank of albania target. taking into consideration the information above, the supervisory council concluded that inflationary pressures in the medium term are contained. in the absence of abrupt shocks, inflation is expected to drop further and stay within the target band of the bank of albania during the time span of the monetary policy action. risks distribution remains overall symmetric : slower than projected economic growth would lead to a rapid reduction of inflation, while a further consolidation of imported inflation could keep inflationary pressures high for