Money supply growth resumed in August
Despite turbulence in the external markets and pre-election tensions domestically, the situation in the Latvian economy, including the financial markets, has been stable. After contracting for two months, growth in bank attracted deposits and total money supply resumed in August, lending to businesses expanded for a second consecutive month, the consumer loan balance increased slightly and growth was pronounced in the loans granted in lats. Lending to households continued to contract, yet the process was slower than in the previous months. As the summer season concluded, demand for cash currency did not change substantially.
The total bank loan portfolio still shrank slightly (by 0.2%), yet the annual rate of domestic loan contraction (8.6%) did not change substantially. Loans in euro continued to decrease at a modest pace while lats loans increased by 4.3%. The rate of annual growth in lats loans thus reached 13.5%, and the proportion of lats loans in the total grew to 9.4%.
The M3 money indicator, which characterizes the amounts of cash and non-cash currencies in the economy, grew to 1.0% in August, with the annual growth of M3 at 4.1%. The balance of bank-attracted domestic deposits increased by 1.0% in August, with the bulk of the increase accounted for by deposits in euro made by businesses. This deposit growth was promoted by export revenue, the moderate growth of domestic consumption, and the resumed inflows of loan funds. The growing consumption had a decreasing effect on household savings and household deposits in lats contracted. It was, however, only short-term household deposits that had this dynamic: deposits with a maturity of over one year grew by 4.0%, indicating that some of the households have resumed saving against the background of contracting unemployment and moderate increase in salaries.
The growing risks of contracting external demand because of the instability of the global economic environment, cautious spending of businesses and households as uncertainty regarding further budget consolidation processes remains as well as the expanding imports in the coming months will limit money supply, whereas the impact of financing from EU funds will be positive. Until a new government is formed, some uncertainty will remain in domestic politics, yet the stabilizing of money supply and first positive trends in lending will support further development of the economy. These trends would be reinforced by succession in fiscal and economic policies and resolute actions by the new government in drafting the 2012 budget, adopting a budget with a deficit that does not exceed 2.5% of GDP and not revising the tax policy strategy for 2011-2014, where there is expressed the determination to not raise taxes.