On January 3 Bulgarian National Bank (BNB) set the basic interest rate at 4.68 per cent, one per cent higher than was set last December. The new rate was the highest basic interest rate set by BNB since January 2002, when it was 4.78 per cent. The increase of the basic interest rate did not come as a surprise since there had been a trend of rising interest rates throughout 2007.

Despite this tendency analysts saw nothing worrying in the high basic interest rate. "The influence of the basic interest rate on the financial market is indirect and therefore not that serious. The proof is that banks maintained relatively high interest rates in the last quarter of 2007. Therefore in the short term horizon companies will not be affected by the increase," Tsvetoslav Tsachev, head of the analysis department at Elana Trading investment company, told The Sofia Echo.

Tihomir Toshev, executive director of credit consultant company CreditCenter, had a similar opinion. "The increase of the basic interest rate will not affect the market in terms of loans because banks do not form their interest rates solely on what BNB sets as a basic interest rate," Toshev told The Sofia Echo.

"In fact BNB has been increasing its basic interest rate through the entire last year, with only two months registering a slight decline. Overall in 2007 the increase was little more than one per cent. This increase could continue into 2008 but it will be a small gradual increase and because of that it will not affect the loan market and people will not suffer any consequences because of that," Toshev said.

The only way that the new BNB interest rate could affect the market according to Toshev was "if it takes a more aggressive pace but this, in my opinion, will not happen".

As for the loan market in 2008 Toshev expected January to be rather slow in terms of loan applications, "which is normal for this time of the year. After the Christmas and New Year's eve euphoria is over I expect another increase in loan applications".

Indeed CreditCenter's data for December last year showed that Bulgarians were really euphoric when it came to mortgages. According to the data, the average value of a mortgage taken out by an individual in December was 38 457 euro. In Sofia the average mortgage was 55 610 euro, in Varna 46 320 euro, Plovdiv 39 200 euro and Bourgas 33 100 euro. The majority of mortgages (55 per cent) were taken out by people aged between 22 and 35 years of age. People aged 35-45 years took up 26 per cent of the mortgages while those aged over 45 took out 14 per cent. In terms of size 23.75 per cent of the mortgages in December were for sums above 50 000 euro.

As there was such a high number of deals, registry offices around the country, as well as notary offices, were unable to process 35 per cent of the deals in the big cities. In smaller towns, however, this problem did not occur which resulted in the unusually high proportion of mortgages taken out in smaller towns in December.

According to another loan consultant company, Creditex, the credit portfolios of Bulgarian banks deteriorated in 2007 because of the intensive lending. The growing number of bad loans drew into the spotlight the need for the creation of a credit registry that would keep track of a person's debts not only to banks but to all other lenders as well.

In 2007 home lending showed the first signs of over-saturation as the interest rates on the European market moved up, Creditex said in a report. The supply of homes in the big cities outpaced demand for the first time with a large number of new homes about to become available on the market. The prices of old prefab flats and poorly built new apartments fell 10-15 per cent.

Other trends in 2007 included the growth in alternative financial companies offering more flexible loan solutions than those typically offered by banks. This was driven by the consolidation in the banking sector, opening up a niche for these financial companies. The average corporate loan had an average repayment term of five to seven years, Creditex said.

As for deposits, BNB's data showed that interest rates increased by 42 per cent over the course of 2007. The real annual interest rate on deposits in leva increased to 4.69 per cent by the end of November 2007, up from 3.31 per cent a year earlier. Deposits in euro registered a more substantial increase of just below 30 per cent.

The higher interbank deposit rates were due, according to Creditex, to the global financial crisis that originated on the US mortgage market. The rates were also influenced by the measures introduced by BNB in September 2007 to curb lending. BNB raised the minimum required reserves from eight per cent to 12 per cent, which reduced the liquidity of the system. The US crisis will be one of the reason why the increase of rates will continue in 2008 analysts said.