The money supply indicators reflect political and economic uncertainty
The end of the recession period in Latvia, along with several indicators in the real sector, is also marked by an increase in the amount of money in circulation. After a small decline in the previous two months, the money indicator M3, which characterizes the amount of cash and non-cash currency in the economy, has increased again in July (by 0.4%), whereas the M3 annual increase has already reached 8.0%.
The amount of money in July was increased primarily by the high demand for cash currency characteristic of the summer season: its amount in circulation increased by 2.3%. There was a small increase in the bank-attracted overnight deposits, as well as term deposits, however, as deposits with a term of warning before withdrawal shrank, the total amount of domestic deposits in July practically equalled the June amount. Year-on-year, the July balance of deposits grew 6.9%.
Domestic loans in July continued to shrink at the previous rate. Over a month, they decreased by 0.9%, with the loans to non-financial businesses shrinking at a faster than average rate. The rate of the annual decrease in lending as a result was 7.7% in July.
Even though the positive trends in the economic development have stabilized money supply, its rate of increase has been rather slow. The fact that a greater activity in the last few months has been observed mostly in the more liquid, i.e. cash currency and demand deposit segments as well as the fact that lending continues to fall indicate that the market participants 1) are observing the still complicated economic situation, 2) are waiting for the dotting of the political "i" expected in autumn and 3) they lack clarity regarding the budget for 2011: i.e. to what extent and by what measures the reduction of the deficit will be accomplished.