RIGA - Latvia is the only European Union member state in which loan interest rates are lower than inflation, the head of the Bank of Latvia told journalists last week. "Although nominal interest rates on loans in Latvia are among the highest in the EU, in reality 's that is, considering the inflation level expected for this year 's the rates are very low," Bank of Latvia President Ilmars Rimsevics said. "For instance, in March this year, the average interest rates on loans granted to companies or, more precisely, to non-financial enterprises, were lower than the expected inflation."
Latvia is currently the only member of the EU in which interest rates on corporate loans are negative: while the real average interest rates in the EU are 2.5 percent, in Latvia they are minus 0.4 percent.
In Lithuania, the real average weighted interest rates on corporate loans are 1.2 percent, and in Estonia 1.1 percent.
The Bank of Latvia president pointed out that the real interest rates on loans paid to households in March also were insignificant 's 1.2 percent, which is the third lowest figure in the EU, where the average rate is 4.7 percent. In Lithuania the respective figure is 1.4 percent and in Estonia 4.9 percent.
"With such interest rates annual lending in March grew 64 percent, and in absolute figures the monthly growth by more than 300 million lats (426 million euros) was a record in recent years," Rimsevics said.
The central banker has been a critic of the government's fiscal policy, but with elections coming up this year, it is unlikely to expect an austerity budget for the sake of combatting inflation.
The central banker said there are more and more signs suggesting that the steep increase in lending is one of the main factors sustaining strong domestic demand in Latvia. He said Latvia was facing unacceptably high inflation for the third year in a row.
Consumer prices in Latvia this April were up 6.1 percent from April 2005, said the Latvian national statistics office.