lv

Press release of July 14, 2005

Today the Council of the Bank of Latvia resolved to leave unaltered the refinancing rate and the interest rates on bank deposits with the Bank of Latvia and Lombard loans; however, the reserve ratio for banks and subsidiaries of foreign banks was raised from 4% to 6% (the resolution will take effect on August 24, 2005) to facilitate the macroeconomic stability as a precondition for further growth of the national economy.

This resolution was based on the following considerations regarding economic development: The Latvian national economy continues to grow rapidly, at the same time showing signs of macroeconomic imbalances: robust inflation and high current account deficit. The development of the domestic demand factors suggests that marked slowdown in the economic growth is not expected in the near future - the opposite seems likely. Therefore, in view of previous inflationary developments and currently available information on the planned price changes in the future, the Bank of Latvia raises its annual average inflation rate forecast for 2005 to 6%. The Government's fiscal plans for the second half of this year, inter alia the expected budgetary deficit at the end of 2005, are less than explicit.

In view of the limited effect of interest rates in Latvia after the lats peg to the euro, the Council of the Bank of Latvia resolved to raise the applicable minimum reserve ratio from the currently effective one of 4% to 6%.

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.

To ensure stabilisation of the macroeconomic situation, the Bank of Latvia raised the bank minimum reserve ratio from 3% to 4% on July 24, 2004; as of January 24, 2005, it included bank liabilities to foreign banks and foreign central banks in the minimum reserve base, with a view to achieving equal bank competition conditions, given the diverse sources of funds attracted by Latvian banks.

The minimum reserve ratio is one of the monetary policy instruments of the central bank. Its increase implies a corresponding decrease in the amount of funds at the disposal of banks that they can use at their own discretion, inter alia when granting new loans.

The bank minimum reserve requirement is calculated as a definite percentage of deposits of companies and private persons (resident financial institutions and non-financial corporations and households, to be more accurate) and of securities issued by banks 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 a month to the 23rd day of the next month.