Bank holds refinancing rate steady

RIGA - The Bank of Latvia kept its benchmark refinancing rate unchanged after lowering it three times in the last 16 months, reports Bloomberg. The rate was held at 3.5 percent, said Governor Ilmars Rimsevics. The central bank cut its seven-day deposit rate by half a percentage point to 0.5 percent, and lowered the overnight deposit rate to 0.375 percent from 0.5 percent to spur lending in the economy. The bank has cut the main rate a total of 2.5 percentage points since March 2009.
Latvia exited the European Union’s deepest recession last quarter after exports and industrial production picked up, generating a 0.3 percent expansion from the previous period. The economy may contract between two percent and 2.5 percent this year, believes Rimsevics.

“The Latvian Bank’s goal, by lowering the deposit rates to promote lending, will be difficult to achieve,” said Andris Larins, an analyst at Nordea Bank in Riga, in an e-mail. “The main obstacle to credit growth is the weak health of the economy and the comparatively small number of quality borrowers.”
Rates on the three-month Rigibor, the interbank lending rate, were at a record low 1.65 percent on July 19. The three-month rate climbed to a high of 29.8 percent on June 26 when speculation mounted that the country may have to devalue its currency.

The government was forced to turn to a group led by the European Commission and the International Monetary Fund in 2008 for a 7.5 billion euro loan to shore up the economy. “Latvia does not need to borrow the whole loan” because it has sufficient funds in its reserves, Rimsevics said. The state will see borrowing costs drop after it adopts its 2011 budget, he said, adding that Latvia has no need to draw on its bailout for the remainder of the year.

Poland, the Czech Republic, Estonia and the Nordic states had previously agreed to lend Latvia money as part of its international loan program. The government agreed with its bailout donors not to enter bilateral loan arrangements beyond the IMF and EU deal, Prime Minister Valdis Dombrovskis said on June 7.

The refinancing rate affects the minimum interest rate on central bank swaps and repurchase agreements, worth about 75 million lats (107.1 million euros) a week.