On Resolutions Passed by the Bank of Latvia's Council

Riga, 16 November 2006

In view of the macroeconomic trends in Latvia and climbing interest rates in the euro zone, the Bank of Latvia Council resolved today to raise the refinancing rate set by the Bank of Latvia by 0.5 percentage point to 5.0%. The Lombard rates are likewise being raised by 0.5 percentage point. This resolution will take effect on 17 November.

The development trends of the Latvian economy dictate a continuation of the restricting monetary policy: the inflation levels remain high, the current account deficit has reached a record high and the economic growth stimulated by lending still exceeds levels sustainable in the long term. The use of the interest rate instrument is also directly related to the monetary policy in the peg - i.e. euro - zone. Since the previous raising of the lats refinancing rate on 15 July, the European Central Bank has raised the euro base interest rate twice, by a total of 0.5 percentage point.

The Bank of Latvia Council also made its forecast for the macroeconomic development.

The expected rise in administrated prices and inflation expectations taking hold are the primary reasons why the average annual inflation for 2006 may reach the previously predicted 6.4 to 6.5% and remain within the 6.0 to 6.2 percent range in 2007.

The rapid economic growth in the country is continuing and it is primarily driven by domestic demand. In the growth of gross domestic product (GDP) that we predict at about 11% this year, the main contribution will come from the service sector. Next year, the contribution of the goods sector to the overall economic growth may slightly increase whereas that of the service sector may diminish. The growth of GDP for 2007 is forecast at about 9%.

Export conditions deteriorating under the influence of high inflation, the imbalance of Latvian foreign trade is on the rise. In accordance with our predictions, Latvia may close the year 2006 with a current account deficit which could exceed the 17.9% level of the 2nd Quarter.

As of 17 November, the interest rates set by the Bank of Latvia will be as follows:
- refinancing rate - 5.0% per annum;
- interest rates for bank deposits with the Bank of Latvia:
            - with a 7-day maturity - 2.0% per annum,
            - with a 14-day maturity - 2.25% per annum;
- Lombard loan interest rates:
            - up to 10 days - 6.0% per annum,
            - 11th through 20th day - 7.0% per annum,
            - starting with the 21st day - 8.0% per annum.
The current refinancing interest rate, 4.5%, as well as the Lombard lending rates have been in effect since 15 July 2006 and the bank deposit rates since 16 September 2002.

The reserve requirement for banks and foreign bank branches has been 8% since 24 December 2005.

The Bank of Latvia Council approved the Regulation for the Use of the Bank of Latvia's Monetary Policy Instruments (to take effect on 24 March 2007), approximating these instruments to the ones used by the Eurosystem and establishing a single collateral account for all the instruments, which will improve and alleviate the administration of the collateral. The Regulation includes a number of important novelties, among them a change in the names of the instruments in compliance with the Eurosystem terminology, reduction of the Lombard loan and deposit terms to one night, substitution of repo transactions with auctions of refinancing loans and substitution of reverse repo transactions with auctions of fixed term deposits as well as other changes.

To increase the volume of currency, the Bank of Latvia will use the following monetary instruments:
• Main refinancing operations (7-day loans) and longer-term refinancing operations (3- month loans) - hitherto repo transactions;
• Overnight lending facility - hitherto Lombard loans.
To decrease the volume of currency, the Bank of Latvia will use the following monetary instruments:
• Overnight deposit facility - hitherto fixed-term bank deposits;
• Auctions of fixed-term bank deposits - hitherto reverse repo transactions.
To increase or decrease the volume of currency, the Bank of Latvia will use the following monetary instruments:
• Currency swap transactions - hitherto short-term currency swap transactions;
• Secondary market security auctions - the name remains unchanged.

In conjunction with the approved changes in the use of monetary instruments, the Bank of Latvia Council also approved a new edition of the Regulation for the Securities Settlement System of the Bank of Latvia and amended the Regulation for the Calculation and Fulfilment of the Mandatory Bank Reserve Requirements (both documents to take effect on 24 March 2007).