A moderate upward trend continues in money supply
After the brief contraction of the amount of money in circulation in October, Money indicator M3, which characterizes the amount of cash and noncash currency in the economy grew by 1.8% in November 2010, reinstating the growth tendency observed throughout the year; the annual growth rate of M3 reached 11.9%.
The economic recovery ensured a rapid rise in non-financial enterprise deposits whereas household deposits grew at a more moderate rate reflecting a gradual recovery of consumption. A rapid rise in November was maintained in the liquid segment of bank-attracted overnight deposit segment (2.2%); the rise in term deposits was slower (1.8%), whereas in sight deposits it was faster (6.5%). The demand for cash currency did not change in November.
The balance of domestic loans contracted at a slower rate than in October (-0.6%), with the balance of loans granted to enterprises and households dropping at an almost equal rate; the annual drop in loans did not change in November, remaining at the 8.2% level.
The money supply indicators have by and large been stable in November and are not likely to change substantially in the next few months. December is traditionally characterized by a rise in money supply and January by a seasonal drop, for which the expected rise in taxes could be an additional stimulus. As a result, the higher consumption in late December is likely to raise enterprise and diminish household savings. The drop in household savings will still be little compensated by holiday bonuses characteristic of the precrisis years and it is the savings from previous months that will constitute most of the spending. Despite the fact that banks will continue to grant some new loans, the loan portfolio of the banking sector will continue to contract.
Factors that in the medium term could encourage lending growth on a larger scale are gradually coming to fore: the rise in the competitiveness of Latvian enterprises in foreign markets; a further improvement of Latvia's credit rating; an increase of interbank competition. Risks of lending growth slowdown however remain, among them the possibility of reduced foreign demand as a result of financial difficulties in some euro area countries aggravating and changes instituted within the framework of the new taxation policies in Latvia.