lv

Riga, 11 September 2008

The Bank of Latvia Council resolved today to reduce the reserve ratio for bank liabilities with a maturity of over 2 years from 6% to 5% and to change the reserve ratio for all other liabilities included in the reserve base from 8% to 7%. The resolution will take effect on 24 October 2008. The central bank interest rates, i.e., those of refinancing, overnight lending and overnight deposit, will remain unchanged.

 

Against the background of inflation rates gradually moderating and the banking sector's contribution to the rise in domestic demand diminishing along with a slower growth of lending, it is possible to loosen the hitherto tight monetary policy framework for the financial market, thereby stimulating the financial sector to attract long term funding. A simultaneous lowering of reserve requirements for bank liabilities with a maturity of over 2 years as well as for all other liabilities is expected to even out the availability of funding in lats across the maturity spectrum.

The interest rates set by the Bank of Latvia are as follow:

- refinancing - 6.0% per annum;
- overnight deposit facility - 3.0% per annum;
- overnight lending facility - 7.5% per annum.

The minimum reserve ratio for banks and branches of foreign banks was last changed on 24 April 2008 when it was reduced from 7% to 6% for bank liabilities with a maturity of over 2 years. The refinancing rate was last raised on 18 May 2007 by 0.5 percentage points to 6.0%.

The Bank of Latvia Council approved a revised "Regulation for the Lats Banknotes and Coins". The document regulates the processes associated with the production and circulation of banknotes and coins, including procedures for replacing damaged banknotes. The new wording of the Regulation 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 6% to 5% for bank liabilities with a maturity of over 2 years, combined with a reduction of the reserve ratio for all other liabilities included in the reserve base, is expected to result in a decrease of about 190 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.