Currency in circulation records a slight fall in June; cash and private deposits post an increase

The strengthening of economic activity in Latvia has stabilised the amount of currency in circulation. In June 2010, monetary aggregate M3 which reflects the amount of cash and non-cash instruments in the economy, decreased somewhat whereas the annual growth rate of M3 continued on its upward trend, reaching 5.5%.

In June, an increase in the demand for cash (cash in circulation grew by 2.6%) related to the beginning of the holiday season and the prolonged Summer Solstice holidays had a positive impact on money supply. Household deposits posted a notable rise of +1.4% (lats deposits recorded an even higher pickup of 3.0%), pointing to a potentially stimulating contribution to the recovery of domestic demand. However, the total amount of domestic deposits shrank by 1.4% in June as the amount of time deposits of some public sector corporations decreased.

In June, domestic credit continued to decline, reporting a month-on-month fall of 0.9%, with loans to non-financial corporations posting a more accelerated drop while those granted to households moderated at a slower pace. Hence, in June the annual rate of decrease of loans stood at 7.6%.

The dynamics of money supply is in line with the overall positive trends observed in the economy; moreover, the developments in June suggest a notable concentration of funds in M1, the most liquid part of money supply, which has grown by 3.5% over the month. The pickup in this monetary aggregate, comprising demand deposits and cash, increases the possibility of sooner channelling the liquid savings into consumption, thus also supporting the growth of the manufacturing sector. Furthermore, lending along with an improving capability of businesses and households to borrow could be facilitated by the reduction of the deposit facilities' rates by the Bank of Latvia with the purpose of motivating banks to channel their resources into the development of the economy.