Money supply levelled out; a pronounced rise not yet expected

As economic growth remained moderate, a small drop in money supply was observed yet overall it has been developing in a balanced manner already for half a year. The monthly fluctuations are within 1%, pointing to entrepreneur and household caution with regard both to consumption and accruals, with bank and client caution with regard to lending and borrowing as an added factor. The demand for cash currency did go up as the holiday season began, but the balance of deposits in banks dropped, bringing along a drop in the total currency in the economy. The drop in bank loan portfolio continued, with the rate of annual decrease in domestic loans reaching 9.2% in June.

Money indicator M3, which characterizes the amount of cash and non-cash currency in the economy, dropped by 1.0% in June, with the annual rate of growth of M3 falling to 5.4%. The annual rate of growth of cash currency in circulation dropped (to 14.2%), whereas the annual growth of deposits attracted by banks increased to 3.4%. The drop in M3 was determined by a drop in term deposits while the balance of overnight deposits increased moderately. The deposits of both private businesses and households increased slightly in June while the balance of lats deposits of public non-financial corporations decreased.

The drop in the balance of loans was determined in June by the almost constant drop in loans in euro (by 1.6%), whereas loans in lats dropped by only 0.5%, with their annual growth reaching 4.7%.

The current course of economic development along with the drop in industrial confidence indicator and the cautious attitude of consumers in conditions of rising prices still do not ensure a stable renewal of money supply growth; nor can we can expect it in the near future. Likewise, no increase in lending is expected at least for this year – because of the still unknown plans for cutting the 2012 budget deficit and the potentially unstable situation in the external markets. For that reason, the most important precondition for a positive development in money supply in the relatively near future would be a consistent effort by the government in drafting the 2012 budget, avoiding tax increases and ensuring deficit cuts in the budget by limiting expenditure.