Latvia Cuts Main Interest Rate for First Time Since 2010

Latvia’s central bank, which pegs its currency to the euro, cut its benchmark interest rate for the first time since 2010 after the European Central Bank lowered borrowing costs last week.

Latvijas Banka reduced the refinancing rate to 3 percent from 3.5 percent, Governor Ilmars Rimsevics told a news conference today in the capital, Riga. Overnight deposit rates were cut by 0.15 percentage point to 0.25 percentage point, while rates on the marginal lending facility were lowered by as much as five percentage points.

The Baltic country’s economy, which expanded a revised 6.9 percent from a year earlier in the first quarter, is at risk as Europe’s debt crisis threatens to derail growth. The ECB trimmed its main rate by 25 basis points to a record-low 0.75 percent on July 5, citing economic weakness.

Latvia’s borrowing costs were cut as “risks for price stability in the medium term are limited and inflation continues to slow,” the central bank said in an e-mailed statement. “The expected negative influence of the European debt crisis,” will also affect the economy.

The yield on Latvia’s dollar bond due 2021 fell 1 basis point today to 4.67 percent. The cost of insuring government debt against non-payment for five years using credit-default swaps rose to 261 basis points from 254, data compiled by Bloomberg show.

Inflation eased to 1.9 percent from a year earlier last month, the slowest pace in 20 months as energy costs fell. Gross domestic product will grow 3.5 percent to 4 percent this year, Rimsevics told reporters, upgrading a previous 1.3 percent estimate.

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

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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