| Bank of Latvia cuts refinancing rate to 4 pct |
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| Thursday,May 14,2009 Posted: 15:52 BJT(0752 GMT) |
| From:Baltic News Service Article type:Original |
RIGA, May 13, BNS - The Bank of Latvia Council on Wednesday resolved to reduce the Bank of Latvia refinancing rate to 4 percent from 5 percent, reported the central bank.
"The decision was adopted in view of a continued drop in economic activity, diminishing inflation and the weak lending activity. A reduction in the interest rate would constitute an additional stimulus for encouraging activity in the interbank lats money market and motivate the banks to direct their available resources toward lending to the economy," the Bank of Latvia said in a statement.
The new refinancing rate will take effect on May 24.
Dainis Gaspuitis, a macroeconomics expert with SEB Banka, told BNS that lowering of the refinancing rate won't have any effect on the economy and won't bring down interest rates.
"The interest rates in lats will change mainly under influence of the prevailing economic processes, the macroeconomic policies of the government and the progress of reforms. The Bank of Latvia has very minimal chances to influence economic processes. At present all tools and instruments are in the hands of the government," he said.
Andris Larins, an expert with Nordea Markets, the financial market arm of Nordea Bank, told BNS that lowering of the refinancing rate won't have any serious effects on the Latvian economy in general or households in particular.
As more than 80 percent of loans taken by Latvian households were in euros and only about 10 percent of people had loans in lats, the central bank decision is unlikely to have any serious effects on households.
Commercial banks also will not be affected because the refinancing rate usually influenced the minimum rate for borrowing lats from the central banks through repo or swap deals but in case of high demand for lats the money is lent by the auction principle -- the money goes to those, who are willing to pay higher interest, explained Larins.
He said that government with its plans concerning budget amendments and measures for heating up the economy ad a much greater influence on the national economy. The government should be more aggressive in cutting expenditures, said Larins, because the latest budget performance figures show that expenditures under the national budget in April this year had been only 2 percent lower than in April 2008 while revenues to the budget last month had decreased by 26 percent.
The marginal deposit facility rate with the Bank of Latvia remained unchanged at 1 percent. The mandatory reserve requirement, one of the central bank's key monetary policy instruments, also has not been changed since December 24, 2008, and remains 3 percent for liabilities with maturity of over two years and 5 percent for other liabilities included in the reserve base.
The refinancing rate is one of the key interest rates set by the Bank of Latvia, which influences interest rates on the lat-denominated resources offered by the central bank and also affects the rates on the Latvian money market.
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