lv

Riga, 13 November 2008

The Bank of Latvia Council resolved today to reduce the reserve ratio for bank liabilities with a maturity of over 2 years from 5% to 3% and to reduce the reserve ratio for all other liabilities included in the reserve base from 7% to 5%. The resolutions will take effect in two steps: on 24 November 2008 both ratios will be lowered by 1% each, and on 24 December by another 1%. The central bank interest rates, i.e., those of refinancing, overnight lending and overnight deposit, will remain unchanged.

Against the background of inflation rates moderating at a quicker than expected pace, and the banking sector's contribution to the sustaining of domestic demand diminishing along with a weakening economic activity and a slower growth of lending, it is possible to loosen the hitherto tight monetary policy framework for the financial market, thereby freeing up additional financial resources that banks can now channel to lending to promote economic growth. In view of the current tightness of funds, the releasing of additional resources is expected to improve the banking sector's liquidity

The interest rates set by the Bank of Latvia are as follows:
- refinancing - 6.0% per annum;
- overnight deposit facility - 3.0% per annum;
- overnight lending facility - 7.5% per annum.

The minimum reserve requirement for banks and branches of foreign banks was last changed on 24 October 2008, when it was reduced from 6% to 5% for bank liabilities with a maturity of over 2 years, and from 8% to 7% for the rest of liabilities included in the reserve base. The last change of refinancing rate by 0.5 percentage point, to 6.0%, took place on 18 May 2007.

The Bank of Latvia Council approved "System Regulations for Participation in SAMS" and "System Regulations for Participation in EKS" (to take effect after being published in the newspaper "Latvijas Vestnesis"). The purpose of the Regulations is to simplify and harmonise the legal framework for the settlement systems of the Bank of Latvia: SAMS - the real-time automated interbank gross settlement system for lats, EKS - the electronic clearing system for lats and euro, and TARGET2-Latvija - the gross settlement system for euro. The documents do not provide for changing any of the systems' operational principles or conditions; instead, the range of institutions eligible to participation in SAMS and EKS has been complemented with other settlement service providers in Latvia - the EU national central banks, the European Central Bank as well as other institutions, including the Treasury. The Regulations will be made available on the Bank of Latvia website under "Legal", and will be published in the newspaper "Latvijas Vestnesis".


The minimum reserve ratio is one of the monetary policy instruments of the central bank: the higher the ratio, the higher the cost of funds to the banks, thus affecting the lending capacity of the banks. The lowering of the bank minimum reserve ratio from 5% to 3% for bank liabilities with a maturity of over 2 years and a reduction of the reserve ratio for all other liabilities included in the reserve base from 7% to 5%, is expected to result in a decrease of about 380 million lats in the minimum reserve requirement.
The bank minimum reserve requirement is calculated as a set percentage of deposits attracted by banks and securities issued by banks and is to be held with the Bank of Latvia; the amount of this requirement must be maintained as a monthly average. The compliance with the minimum reserve requirement is assessed within the maintenance period from the 24th day of the month to the 23rd day of the next month.