Latvia’s central bank left its benchmark interest rate unchanged for a seventh meeting as the economy continues to recover from its worst recession.
The refinancing rate was held at 3.5 percent, Governor Ilmars Rimsevics told reporters today in Riga. The bank has cut the rate a total of 2.5 percentage points since March 2009.
Latvia’s economy is recovering after shrinking a cumulative 25 percent since 2008, the deepest contraction in the world. Economic output, which grew an annual 3.4 percent in the first quarter, may expand by about 4 percent for the full year, according to Swedbank AB, the biggest bank in the Baltic states.
“Taking into account the gradual recovery of the economy and the fact that the current inflation risk factors are not related to a rise in demand and risks to price stability in the medium term are limited, the Bank of Latvia Council today resolved to leave unchanged the interest rates and the mandatory reserve requirement,” the bank said in a statement.
The country turned to a group led by the European Commission and the International Monetary Fund for a 7.5 billion-euro ($10.7 billion) loan in November 2008 and has implemented austerity measures including tax increases and spending cuts of more than 16 percent of gross domestic product.
Consumer prices increased an annual 4.5 percent in April, the fastest growth since May 2009, as the cost of fuel and food accelerated.
“The rise in inflation at the beginning of the year is determined by supply side factors and administrative decisions, such as the raising of taxes,” according to the statement. “The demand side is still acting as an inflation limiting factor: the development of wages and consumption is quite moderate; unemployment is dropping slightly yet it remains high, and bank lending is still contracting.”
Borrowing in lats for three months on the Rigibor, the country’s interbank lending market, was a record 63.6 basis points lower than the three-month Euribor today. The spread between the two rates turned negative on Nov. 5, a day after the central bank cut two short-term interest rates. It reached a high of 2,868 basis points in June 2009, when speculation mounted that the lats currency would be devalued.
The refinancing rate affects the minimum interest rate on central bank swaps and repurchase agreements, worth about 75 million lati ($150.2 million) a week. The bank runs a quasi-currency-board system, where lati in circulation are backed by foreign currency.