Press release of September 22, 2005
At its September 22 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, taking into account the limited effect of interest rates in Latvia after the lats was pegged to the euro. The minimum reserve requirement ratio applicable to banks was also preserved at 6%, as the time that has elapsed since August 2005 when this ratio was raised from 4% to 6% is insufficient to enable to assess objectively the banks' reaction to such a decrease in available funds, i.e. liquidity.
Resolution is based on the following economic development considerations:
During the summer months, Latvia's inflation has remained broadly unchanged; therefore, there are no signals of a change in trends in the excessively rapid price increase. It is also expected that the average annual inflation will reach 6% rather than the 4%-5% forecast at the beginning of the year.
The inflation rise is driven by factors on the demand side, including the high oil prices, climbing administered prices and changes in taxes, and also such a stimulating factor as high domestic demand sustained by buoyant economic development and high growth rates of lending, for especially household loans. The demand is additionally fuelled by the central government budget policy (increasing expenditure in the process of budgetary amendments). From the point of view of ensuring macroeconomic stability, the current approach during the uplift of the economic cycle should be to reduce the budget deficit year by year. Unemployment and wages and salaries developments suggest that the national economy has already almost reached its full capacity, several sectors displaying certain signs of overheating. Therefore, additional stimulation of the economy on account of the budget deficit is not desirable, as it cannot secure balanced growth rates in the long term and acts as one of the factors sustaining inflation in the short term. The above-mentioned lending growth rate is also too high and cannot be sustained in the long term.
Therefore, the central bank expects that the first signs of a further rise of inflation will urge the Government to resort to the timely prepared action plan for dampening the inflation growth rates without hesitation, in order to ensure macroeconomic stability and balanced long-term development in Latvia.
We remind that the current interest rates set by the Bank of Latvia are as follows:
- the refinancing rate - 4.0% per annum;
- the 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;
- the 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.