June 1 (Bloomberg) -- Latvia’s overnight lending rate rose to a record today because of a shortage of lati on the market after central bank purchases of the currency and Treasury bill sales, said Andris Larins, an analyst at Nordea AB.

Asking rates on the overnight Rigibor, the interbank lending market, rose to 14.2 percent after the central bank bought 95.4 million lati ($191.5 million) to support the currency last week. Treasury bill sales and higher interest rates on money the central bank charges to borrow also contributed, Larins said.

The bank has bought about 475.7 million lati ($954.6 million) this year after the currency weakened to the limit of its trading band, removing them from circulation. The bank bought about 768.6 million lati last year to defend the currency and foreign currency reserves have fallen about 38 percent to $3.8 billion, according to April data, compared with September.

“We don’t expect any improvement on the rates,” said Larins. The market is “in stress” and rates are rising partly because the central bank in December raised the cost of borrowing based on the frequency of usage by commercial banks.

For lenders that borrow from the central bank’s overnight rate for five days or less, the interest rate advanced to 7.5 percent. For lenders that borrow from the central bank for no more than 10 days, the rate rose to 15 percent and for lenders that use the facility for more than 10 days, the rate increased to 30 percent, the central bank said.

The lats is allowed to rise or fall 1 percent from a mid- point against the euro in a quasi-currency board system in which currency in circulation is backed by foreign currency reserves held at the central bank.

The Baltic country took a 7.5 billion-euro ($10.7 billion) bailout after its economy contracted 10.3 percent in the fourth quarter and it took over its second-biggest bank. The economy shrank a preliminary 18 percent in the first quarter.

To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net

Last Updated: June 1, 2009 07:09 EDT