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Press Release of March 11, 2004

At its meeting on March 11, 2004, the Bank of Latvia's Council resolved to change the refinancing rate set by the Bank of Latvia, increasing it by 0.5 percentage points (to 3.5%). The Council also resolved that the interest rates on Lombard loans and bank time deposits would remain unchanged. The resolution to increase the refinancing rate was made in support of the further growth of on-going successful development of the economy and with the aim to minimise the effects of various macroeconomic risks (a large budget deficit, high inflation rate and external economic imbalances among them).

The resolution of the Council of the Bank of Latvia in respect of the refinancing rate is based on the following considerations. The domestic demand, which is the major factor stimulating growth of the national economy, is not showing any notable signs of a slow-down. On the one hand, it is driven by a notable rise in labour remuneration, which, according to official statistical data, in some areas exceeds the growth of productivity. On the other hand, the domestic demand is also substantially affected by the rapid growth of lending.

Simultaneously with enhancing the domestic consumption, the rapid growth of lending is a driving force behind a rising foreign trade deficit. The budget deficit in the amount of over 2% of the gross domestic product projected for 2004 is inadequately high; hence action towards reduction of the budget deficit should be taken in the coming months. And though the current rise in inflation is mainly determined by a number of external factors on supply side, such as the exchange rate and changes in administratively regulated prices, there are grounds for an inference that the persisting high and even increasing domestic demand begins to have an effect, at least to some extent, on inflation in Latvia. An economically unfounded increase of prices based on a public assumption that a price rise is to be expected in the future, is looked upon as an essential inflation-driving factor.

On the basis of the latest review of macroeconomic development and liquidity trends within the banking sector, the Bank of Latvia's Council resolved also that lowering of the current reserve requirement for banks was not desirable, hence the reserve requirement will remain unchanged at 3.0% until the end of the year.

The Bank of Latvia is committed to conduct a careful analysis of macroeconomic development trends also in the future and, if required, to use instruments at its disposal to ensure sustainable growth.    

The current interest rates set by the Bank of Latvia are as follows:  
- The refinancing rate - 3.5% per annum.  
- The interest rates on bank time deposits with the Bank of Latvia:  

 

- 2.0% per annum for 7-day deposits;  
- 2.25% per annum for 14-day deposits.  

 

- The interest rates 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 of 21 days and more.

 

The refinancing rate is one of the major interest rates set by the Bank of Latvia, which has an impact on the interest rate on lats resources offered by the Bank of Latvia and hence also affects the interest rates on Latvia's money market. The refinancing rate has been lowered on several occasions since the mid-1990s, with the latest reduction by 0.5 percentage points to 3% on September 13, 2002.