The amount of money in the economy almost unchanged
The drop in money supply observed in October was the smallest over the past six months, reflecting abating recession and gradual stabilizing of the macroeconomic situation. Broad money M3, which characterizes the total amount of cash and non-cash in the economy, diminished by only 0.3%. With cash demand to some extent diminishing, a small (0.1%) rise in domestic deposits was even observed in October. On the other hand, the drop (of 0.6%) in loans granted to the private sector continued to characterize the low domestic demand and the less than clear atmosphere surrounding investments and business activity in the country.
The rise in domestic deposits had a positive effect on money supply as euro deposits grew and lats deposits diminished somewhat. The reduction in private deposits as a result of diminishing incomes and growing unemployment was reflected in the reduction in deposits in the household sector (by 1.2%), whereas business deposits increased by 1.8% over the course of one month.
The flow of loans to the private sector continued on a downward trend. The lending policies of banks were still very cautious and the demand for loans by private individuals and businesses was likewise low. A positive development was the stability of the industrial loan portfolio and the increase in such loans both from the monthly and annual perspective. The demand for loans could be boosted by a reduction in interest rates on both lats and euro loans, which was already observed in October, especially in regard to loans granted to businesses.
The pace of annual change for the main monetary indicators has for the second month running been pronouncedly better for broad money M3 and deposits; for loans the annual dynamics could begin to improve as early as the end of this year.
The developments in money supply over the next few months will be determined by a reduction in private deposits as consumption is on a seasonal increase (especially during the holiday season) thus increasing the money resources at the disposal of businesses. During the last months of the year a higher demand for cash is also possible. Activity in lending, especially regarding loans granted for entrepreneurship, will be fostered by stabilization trends in the global financial markets along with a clearer budget and reform process in Latvia.