In a report issued on Tuesday, the credit ratings agency wrote that the growth would be well above the 1.2% forecast growth rate for the euro area.
It wrote:

“Strong expansion in the financial sector, partly resulting from relocation of financial services from the UK in preparation of Brexit, and sustained demographic growth will support domestic consumption, foreign investment and employment.”

The report highlighted the fact that housing shortages in relation to demand will only continue to push prices higher. But the Moody’s report says risks are mitigated by “substantial financial assets held by Luxembourg households. The government has taken steps to boost housing supply and address rising risks from banks’ exposures to the housing sector, mainly by tightening banks’ underwriting standards.”

Low interest rates continue to undermine income yields on loans and securities portfolios, and this presents a challenge as operating costs are rising thanks to wage indexation, regulatory costs and IT and digital investments.

The report concluded that loan diversification was an effective remedy for keeping asset risk in check. It found that the average problem loan ratio and loan impairment charges of the country’s three biggest banks was among the lowest in the euro area.

It wrote:

“Loan performance will be broadly stable, supported by banks’ diversified lending outside Luxembourg and the high quality of their investment portfolios.”

Capital levels, meanwhile, were found to be among the highest in the euro area, providing larger loss absorption buffers. Average Tangible Common Equity was 21.5% of risk-weighted assets for the three largest banks in 2018. “We expect these ratios to moderate slightly due to loan growth,” Moody’s wrote.