Upward trend in amount of money in circulation stable

An increased activity in the economy and growing trust in it for close to six months now has been evidenced by the dynamics of money supply.  In four of the last five months (a small seasonal decrease in January excepting) a steady rise in money in circulation was observed. That was also the case in March of 2010 when the money indicator M3, which characterizes the total amount of cash and non-cash currency in the economy, grew 2.3%. For the first time since November of 2008, the annual changes in M3 were also positive (+3.5%).

The annual rise in domestic deposits at the end of March was even more pronounced (6.0%), with the balance of deposits attracted by banks growing 300 mil. lats year-on-year. The stable export growth, improving confidence indicators, more beneficial tendencies in the retail turnover as well as the inflow of government financial resources in the economy in March promoted a rise in both domestic deposits (2.4%), and demand for cash currency (0.4%).

The decisive role in the growth of deposits both overall and in the enterprise and household sector was played by the increase in deposits in lats (3.6%), with euro deposits growing only in the enterprise sector. However, the household euro deposit decrease notwithstanding, the overall rise in household deposits because of the faster rate at which lats deposits grew in March outpaced the rise in February.

Although some banks have stated their wish to activate lending, the overall attitude of banks toward lending is still reserved, which is determined by the high percentage of loans with missed payments. The demand for loans remains low. As a result, the amount of loans granted to the private sector decreased 1.0%. The loans to enterprises shrank more but loans to households very little. The drop in commercial loans granted to enterprises had the greatest impact.

With the negative effects of recession abating in the economy and growth resuming in the export branches, a rise in money supply will probably persist in the next months. A rise in deposits will depend on the improved financial position of the enterprises exporting goods and services; a rise in household deposits could be augmented by payouts of pensions withheld last year. This factor, particularly in April, could have a substantial increasing effect on the demand for cash currency. A positive growth in lending however can only be expected with a resumed domestic demand.