On Resolutions Passed by the Bank of Latvia's Council


Press release of January 12, 2006

At its January 12 regular meeting, the Bank of Latvia's Council resolved to leave unaltered the refinancing rate and interest rates on bank deposits with the Bank of Latvia and Lombard loans, as well as the reserve ratio for banks and branches of foreign banks. This resolution is related to the fact that the previous increase of the reserve ratio took effect only on December 24, 2005. Nevertheless, it has to be stressed that, with the current economic development tendencies continuing, the Bank of Latvia's Council will consider implementation of further steps to promote balanced and sustainable economic growth in Latvia.

Analysing the country’s economic development, the Bank of Latvia's Council came to the following main conclusions.

The unacceptably high inflation rate in Latvia is still underpinned by both the supply and demand side factors; nevertheless, the significant inflationary impact of demand tends to gradually strengthen. The growing role of demand in escalation of prices is well demonstrated by the rise of trade sector profits and return on sales in the last quarters. This would be impossible if the domestic demand in Latvia did not exceed the supply and if the inflation expectations (a factor endangering further growth stability) of the population were not growing. The rapidly expanding lending and rising wages and salaries suggest that no weakening of the demand effects can be expected this year as well.

According to the Bank of Latvia's forecasts, against the background of several favourable pre-conditions, the average annual inflation could decrease to 5.5% in 2006 (i.e., provided that the public authorities will successfully implement their anti-inflationary measures, the monetary policy steps taken by the Bank of Latvia will be sufficiently effective and the increase of oil prices will be smaller than in 2005). A potential rise in administered prices poses an additional risk to this forecast, as it would increase inflation expectations and second-round effects, bringing the average annual inflation close to the level of 6%. Moreover, the newly-adopted annual law on budget provides for an inappropriately high government deficit this year (1.5% of GDP), considering the macroeconomic situation.

The Bank of Latvia forecasts that the gross domestic product growth will amount to 8% in 2006. High growth will be sustained on account of increasing wages and salaries as well as drawdown from the European Union funds and the related rise in investment.

The current interest rates set by the Bank of Latvia are as follows:
- refinancing rate - 4.0% per annum;
- interest rates on bank deposits with the Bank of Latvia:
            - 2.0% per annum for 7-day deposits,
            - 2.25% per annum for 14-day deposits;
- interest rate on Lombard loans:
            - 5.0% per annum for loans with maturity of up to 10 days,
            - 6.0% per annum for loans with maturity from 11 to 20 days,
            - 7.0% per annum for loans with maturity 21 days and more.