RIGA - The council of the Bank of Latvia on July 14 decided to raise the refinancing rate by 0.5 percent to 4.5 percent to reduce ongoing risks of macroeconomic stability and to facilitate more balanced long-term economic development, the bank's president, Ilmars Rimsevics, said.
Starting July 15, the bank's Lombard credit rate for loans of up to 10 days is 5.5 percent; for loans from 11 to 20 days 6.5percent; and for loans from the 21st day 7.5 percent. The bank's Lombard credit interest rates had remained unchanged from Sept. 16, 2002.
The refinancing rate is one of the key interest rates set by the Bank of Latvia and one of its few levers to control economic activity in the country. Previously the refinancing rate was 4 percent, which was set on Nov. 12, 2004.
Analysts downplayed the long-term effectiveness of the move. SEB Latvijas Unibanka analyst Andris Vilks told the Baltic News Service that interbank market rates would increase slightly but would probably return close to the current level soon. "I don't think it will have any serious effect on lending or cause the rates to grow," he said.
Hansabanka senior economist Liene Kule said that the bank's decision was meant as a signal to the market that central bankers were determined to continue cracking down on the lending boom. "I think that the market response to this decision will be a growth of short-term interest rates in lats," she said, adding that for commercial banks the repo rate is more important than the refinancing rate.
Speaking of inflation, Rimsevics said any speculation about stabilization was premature. "The latest inflation figures confirm our earlier concerns that the reduction in the first months of this year might be short-term," he said.
He said that after the slight decrease in the first four months of the year inflation grew again in May. It then fell again a little in June, but annual price growth still remains high at 6.3 percent, the highest in the European Union. The growth of prices for services was very steep 's from 5.6 percent in May to 6.7 percent in June.
"Such changes in the price dynamics require even greater attention in following the inflation development trends," said Rimsevics, adding that strong domestic demand still continue to have a serious effect on inflation. Demand, he said, was bolstered also by growing wages and expanding lending.
In June Latvia's statistics office reported that first quarter economic growth reached a staggering 13.1 percent, triggering fears that the nation's economy has overheated and may even disrupt long-term development. The quarterly surge, the highest since the country gained independence in 1991, was led by trade (up 17.7 percent year-on-year), transport and communications (up 13.6 percent), manufacturing (12.7 percent) and construction (17.5 percent). In constant prices, Latvia's GDP amounted to 1.85 billion lats (2.6 billion euro) at the end of March.