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On Resolutions Passed by the Bank of Latvia's Council

 

Press release of March 14, 2006

The Council of the Bank of Latvia resolved today to leave the interest rates pertaining to refinancing, deposits of commercial banks with the Bank of Latvia and Lombard loans unchanged but expanded the compulsory reserve base while leaving the reserve ratio at the previous 8% level. As of May 24 of this year the compulsory reserve requirement will be applied also to bank liabilities with a set term over two years. The reserve base was expanded to slow down the rapid increase in lending as one of the factors contributing to high inflation and to thereby promote macroeconomic stability.

The resolution was based on the following considerations regarding development of the economy:

The inflation level in the country remains unacceptably high. The slowing down in the pace of inflation observed in February was too insignificant to note any substantial positive tendencies. To a significant degree, any decrease in inflation is prevented by the still strong domestic demand that causes increases in consumption more rapid than accumulation of funds and a decline in the current account balance. Since one of the factors contributing to the high domestic demand, is the vigorous lending policies of commercial banks, the Bank of Latvia considers the pace of lending growth too rapid for the current macroeconomic situation. Moreover, from the point of view of macroeconomic stability, the continually increasing foreign debt at whose expense an ever increasing share of domestic loans is financed and the growth of consumer credit are both causes for concern.

Consistent action taken by the Bank of Latvia in limiting loans extended in lats, which is supported by developments in the world’s financial markets, i.e. rising interest rates of other lending currencies, the euro and the U.S. dollar, provides an opportunity to counteract the rapid pace of lending in Latvia and to diminish the risks to balanced growth of the Latvian economy.

The compulsory reserve ratio is one of the monetary policy instruments at the disposal of the central bank, and its increase is aimed at making it more expensive for banks to attract deposits and other capital and thereby affecting banks’ lending capability. Applying the reserve ratio to banks’ long-term (over 2 years) liabilities will mean an increase in the reserve requirement volume by about 210 million lats.  

To the end of stabilizing the macroeconomic situation, the Bank of Latvia made several increases in the compulsory reserve ratio in 2004-2005: as of 24 July, 2004 (from 3% to 4%), as of 24 August, 2005 (from 4% to 6%) and as of 24 December, 2005 (from 6% to 8%). As of 24 January, 2005, banks’ liabilities to foreign commercial and central banks have been included in the compulsory reserve base to equalize the conditions for banks’ ability to compete given the variety of their sources for attracting resources.

The compulsory reserves of banks are calculated as a set percentage of the bank deposits and the securities emitted by banks to be kept with the Bank of Latvia; this requirement has to be met as a monthly average. Meeting of the reserve requirement is evaluated for the period starting on the 24th day of the current month and ending on the 23rd day of the following month.

The Bank of Latvia has set the following annual interest rates:
- refinancing rate - 4.0%;
- interest rates for bank deposits with the Bank of Latvia:
            - with a 7-day maturity - 2.0%,
            - with a 14-day maturity - 2.25%;
- interest rates for Lombard loans:
            - up to 10 days - 5.0% ,
            - days 11 through 20 - 6.0%,
            - as of the 21st day - 7.0%.