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On the Resolutions passed by the Bank of Latvia's Council
In view of the macroeconomic tendencies in Latvia and in support of the Government’s effort in curbing inflation, the Bank of Latvia Council today resolved to raise the refinancing interest rate by 0.5 percentage points to 6.0 The interest rate on overnight credit facility was raised by 1.0 percentage point to 7.5%. The rate on overnight deposits was left unchanged at 2.0%. The reserve requirement and method of its calculation was resolved to be left unchanged. The resolution will take effect on 18 May 2007.
The Bank of Latvia Council is of the opinion that to promote the return of the economy within the zone of macroeconomic stability it is necessary to curb the overly vigorous domestic demand. The rising inflation rate in the past several months confirms the standing analysis, i.e. the too rapid rise in domestic demand is gaining importance as a determining factor. Inflation impedes Latvian exports: under the conditions of rapidly rising production costs, the ability of producers to compete in the main export markets is diminished.
To reduce the macroeconomic imbalance, the economic policy makers must direct their actions toward curbing the government expenditure and increased lending. In this regard, the Government should be commended for its resolve to abstain from amending the budget and develop a surplus budget for the coming years. For its part, the central bank is rising the interest rates in response to developments in the financial markets.
At the moment it is essential that the inflation countermeasures adopted by the Saeima be carried out consistently and fully; moreover, under the conditions of high inflation, the documents should remain open for possible adjustments. It must be understood that the plan cannot produce results immediately; for many of the measures have a long-term effect; the first results may become evident by the end of the year.
As of 18 May the interest rates set by the Bank of Latvia will be as follows:
- refinancing rate – 6.0% per annum; - overnight deposit rate – 2.0% per annum; - overnight credit facility rate – 7.5% per annum.The refinancing rate was last raised by 0.5 percentage points to 5.5%, effective as of 24 March of this year.
The reserve requirement for banks and branches of foreign banks has been 8% as of 24 December 2005.
