Money supply reduced by a unique large-scale transaction; loan shrinkage continues

The October data still pointed to continued stability in the Latvian financial system in the area of amount of money in circulation. Even though money indicator M3, which characterizes the amount of cash and non-cash currency in the economy dropped by 1.9% in October of 2010, the M3 annual growth, at 11.0%, was substantial.

In keeping with the growth of industry, exports, and retail observed over this year, in October the deposits by non-financial enterprises continued to be on the rise while household deposits underwent a moderate drop, reflecting the growing consumption. The rise continued to be most pronounced in the most liquid segments of the money supply - the overnight deposits attracted by banks grew by 1.1% and demand for cash currency went up 2.2%. Yet the total amount of money in October was affected by a reduction by 3.1% of the total balance of deposits as the term-deposit funds of financial intermediaries shrunk as a result of a unique transaction.

The balance of domestic loans, with the amount of new loans lagging behind the paid or written-off loans, dropped 1.1% over a month, loans to businesses and households down equally and the annual drop rate in October reaching 8.2%.

No substantial changes are expected in the deposit and money supply area over the coming months. Household deposits could drop in November and December, as consumption grows, among other reasons, as a result of expectations of increased consumer tax rates and inflation as well as the seasonal growth of demand for cash currency. An opposite effect is possible next year when consumption could be weakened by transferring purchases to this year. For the rise in lending to resume as early as next year, along with the adoption of the 2011 budget that would be oriented toward a sustainable GDP growth, a good provision could be successful work on drafting the middle term - three-year - budget framework.