Interest rates remain steady

RIGA - Latvia’s central bank kept its benchmark interest rate unchanged for a fifth meeting as the economy continues to recover from its worst recession on record, reports Bloomberg. The refinancing rate was held at 3.5 percent, Governor Ilmars Rimsevics said on Jan. 13. The bank has cut the rate a total of 2.5 percentage points since March 2009.
“Taking into account the stabilization of the economic situation, as well as the fact that inflation at the beginning of the year will be determined by short-lived supply-side factors,” and that “risks to price stability are currently insignificant,” rates weren’t changed, a bank statement said.

Latvia’s economy is recovering after shrinking a cumulative 25 percent since 2008, the deepest contraction in the world, since a real estate fueled boom turned bust and its second-biggest bank, Parex, failed. Economic output, which grew an annual 2.9 percent in the third quarter, will expand 4 percent this year, Swedbank said.
 Imports are rising at the fastest pace since the country joined the European Union in 2004, and the economy should expand 3.3 percent this year, Rimsevics said.

 Borrowing in lats for three months on the Rigibor, the country’s interbank lending market, was 15.8 basis points (0.158 percent) lower than the three-month Euribor on Jan. 13. The spread between the two rates turned negative on Nov. 5, a day after the central bank cut two short-term interest rates. It had reached a high of 2,868 basis points in June, 2009, when speculation mounted that the currency would be devalued.

Latvia turned to a group led by the European Commission and the IMF for a 7.5 billion-euro loan package in November 2008.
The refinancing rate affects the minimum interest rate on central bank swaps and repurchase agreements, worth about 75 million lats (107 million euros) a week. The bank runs a quasi-currency-board system, where lats in circulation are backed by foreign currency.