RIGA - The Bank of Latvia has said it was not ruling out the possibility of further raising the mandatory reserve requirement in order to combat the country's runaway inflation.
"The Bank of Latvia will monitor further growth of inflation and general macroeconomic development, and, if necessary, would use tools available to it," said bank spokesman Kristaps Otersons. He added that at the moment it was impossible to say when the bank could raise the mandatory reserve requirement and to what level.
The bank's council on July 14 raised the requirement to 6 percent from the current 4 percent for all financial institutions. The requirement will go into effect Aug. 24, 2005.
The central bank is resorting to reserve requirement adjustments since hikes in the interest rate have largely proved to be ineffective. Many Latvians borrow in euros and dollars, the rates of which the Bank of Latvia cannot regulate.
Last year Latvia posted the highest level of inflation among the EU25, and there is a chance it will win this dubious distinction again this year. The current annual rate is approximately 6.3 percent.
Even though the affect of mandatory reserve requirements is also reduced in the environment of a pegged lat, it helps stabilize the situation, Otersons said.