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MACROECONOMIC DEVELOPMENTS REPORT December 2019
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MACROECONOMIC DEVELOPMENTS REPORT CONTENTS,December 2019. Abbreviations 3,Introduction 4,1 External Demand 5. 2 Financial Conditions 8, 2 1 Decisions of the ECB and other major central banks 8. 2 2 Global financial market developments 10, 2 3 Conditions for financing the Latvian economy 12. 3 Sectoral Development 18,3 1 Manufacturing and energy 18.
3 2 Construction and the real estate sector 19,3 3 Trade 21. 3 4 Transport 22,4 GDP Analysis from the Demand Side 23. 4 1 Domestic demand 23,4 2 Trade balance 25,5 Labour Market Costs and Prices 27. 6 Conclusions and Forecasts 30,7 Analysis of Scenarios 32. 7 1 The impact of more subdued lending on the economy 32. 7 2 The impact of a further drop in wood prices on Latvia s economy 34. Additional Information 36,Statistical Information S1.
MACROECONOMIC DEVELOPMENTS REPORT ABBREVIATIONS,December 2019. Abbreviations,APP asset purchase programme,CSB Central Statistical Bureau of Latvia. DSGE model Dynamic Stochastic General Equilibrium Model. EC European Commission,ECB European Central Bank,EONIA euro overnight index average. EU European Union,EURIBOR Euro Interbank Offered Rate. FRS US Federal Reserve System,GDP gross domestic product.
HICP Harmonised Index of Consumer Prices,IMF International Monetary Fund. MFI monetary financial institution,MRO main refinancing operation. OFI other financial intermediaries excluding insurance corporations and. pension funds, OPEC Organization of Petroleum Exporting Countries. SEA State Employment Agency,SIA limited liability company. TLTRO targeted longer term refinancing operation,UK United Kingdom.
US United States of America,MACROECONOMIC DEVELOPMENTS REPORT INTRODUCTION. December 2019,Introduction, Latvijas Banka s outlook for economic growth in 2019 and 2020 has remained broadly. unchanged since the revision of its forecasts in September However in view of the changes. in the GDP data time series as a result of the revisions to the national account time series. made by the CSB GDP growth is likely to stand at 2 3 in 2019 with the forecast for 2020. remaining unchanged at 2 6, Despite the weak external demand Latvia s export growth was driven by a short term factor. i e a record high grain harvest With uncertainty persisting and the economic sentiment. indicators recording no significant improvement in the euro area several trade partner. growth forecasts for 2020 have become more pessimistic thus preventing a more rapid rise. in Latvia s external demand as well The geopolitical tensions observed elsewhere in the. world resulting in weaker than previously projected global economic growth will also weigh. on it The pronounced global uncertainty also serves as a factor moderating Latvia s domestic. demand particularly the investment activity to a lower level than projected before. Owing to the ECB s accommodative monetary policy stance the financial conditions remain. favourable in the euro area however this opportunity has not been fully used in Latvia so. far and credit institution lending remains sluggish with the external risks and growth decline. slowing down the increase in the loan portfolio At the same time the financial conditions. are affected by the credit institution sector changes made as a result of the financial sector. improvement process, Despite the economic growth slowdown labour demand is high but its supply is limited. therefore unemployment is declining and accelerated wage growth persists Mostly as a. result of oil price dynamics the inflation forecast has been revised slightly downwards in. 2019 inflation is expected to stand at 2 8 slipping down to 2 4 in 2020. MACROECONOMIC DEVELOPMENTS REPORT 1 EXTERNAL DEMAND. December 2019,1 External Demand, The protracted trade wars and Brexit negotiations geopolitical tensions and persistently.
high uncertainty are the main factors underlying the slowdown of the global economic. growth particularly in industry Although robust private consumption is currently still. supporting the growth the first signs of moderation have also been observed in this respect. Therefore it seems that the weakness in industry is gradually passing on to other sectors of. the economy as well Along with the growth slowdown in other countries Latvia s external. demand is also likely to decrease in 2020, The latest IMF estimates suggest that in 2019 the global economy saw the slowest growth. of the last few years With the largest global economies facing slower growth several. major central banks have already taken measures to ensure more accommodative financial. conditions In its October meeting in line with market expectations the FRS reduced the. target range for the federal funds rate by 25 basis points to 1 5 1 75 At the same time. it was a signal that no further cuts are expected in the near term Meanwhile with inflation. and its expectations remaining low in the euro area the ECB decided to reduce the deposit. facility rate and resume asset purchases under the APP until the moment the inflation has. been seen to robustly converge to a level sufficiently close to the ECB inflation target To. ensure progress towards achieving the price stability objective the Bank of Japan amidst. persistently growing risks pointed to its readiness to introduce further interest rate cuts As. to the Bank of England it has taken a wait and see stance given the uncertainty associated. with Brexit which has been postponed again, On account of the depressing global background market participants are expecting the. economic growth to decelerate Nevertheless in the third quarter of 2019 the growth. momentum provided a positive surprise in the US economy Market participants expected. the US GDP to increase by 1 7 in the third quarter but according to estimates the growth. stood at 2 1 According to FRS forecasts next year is likely to see weaker growth i e. below 2 The pessimistic outlook has been mostly associated with the performance in. industry where the amount of both orders and investment is declining Although the US. economic growth is supported by private consumption it is also turning weaker with an. increase of 2 9 in the third quarter vis vis 4 6 in the second quarter Over the last. 12 months the US personal consumption expenditure inflation stood at 1 5 the underlying. inflation was 2 1 i e below the FRS target level this along with the trade tensions. served as a motivator to lower the target range for the federal funds rate In early October. the US China relations continued to worsen as the US Commerce Department on the basis. of human rights violations put 28 Chinese companies and government agencies on a US. trade blacklist However both parties have achieved progress with respect to their mutual. trade relations with the US postponing a tariff increase on Chinese exports to the US from. 25 to 30 in the amount of approximately 250 billion US dollars and both superpowers. pointing out that Phase 1 trade deal could soon be reached. Industrial activity in Japan continued on a downward trend following a fall to a three year. low of 48 4 observed in October the business confidence indicator moved up to 48 9 in. November A considerable fall was registered not only in new orders but also in exports. and production This can be partly explained by the raising of the consumption tax from 8. to 10 economic activity strengthened before the new tax rate took effect but moderated. afterwards At the same time the services sector still demonstrates optimism Meanwhile. in China its rapid economic growth notwithstanding it continues to slow down In the third. quarter its annual growth rate was 6 0 as per the minimum official growth target set by the. Chinese government this was a low of the last 30 years IMF estimates also point to 6 1. and 5 8 growth in 2019 and 2020 respectively Although retail trade still demonstrated. growth 7 8 business confidence had already been on a downward trend for a longer time. MACROECONOMIC DEVELOPMENTS REPORT 1 EXTERNAL DEMAND. December 2019, As to the euro area economic growth continued reaching 1 1 in the third quarter down. from 1 2 seen in the second quarter and exceeding expert expectations However growth. in euro area countries differs notably with Germany and Italy posting the most pronounced. economic growth rate slowdown The global trade tensions particularly strongly affect the. euro area due to its market openness industry in particular where output has already been. decreasing for ten consecutive months In September industrial output volume was 1 7. lower year on year For the time being issues in industry had not yet affected the services. sector and labour market notably overall Despite the fact that unemployment in the euro. area had stabilized at 7 5 a low since the fourth quarter of 2007 and the wage rise. remained high at 2 7 in the second quarter consumer sentiment was deteriorating and the. previously robust business confidence of the services sector was weaker than in the first half. of 2019 A decline in the euro area inflation continued mostly on account of the impact of. global energy price changes Meanwhile in November the results exceeded the expectations. as the inflation and underlying inflation rose to 1 0 and 1 3 respectively However from. the perspective of reaching inflation target it is still considered a weak result. Looking at Latvia s major trade partners we see economic growth moderating there. nevertheless data for the first half of 2019 in our Baltic neighbouring countries were better. than expected therefore Latvia s foreign demand forecast for 2019 has remained broadly. unchanged since June However with uncertainty persisting and the economic sentiment. indicators in the euro area reporting no significant improvement growth forecasts for 2020. in most trade partners have become more pessimistic and are also suggesting a slower. increase in Latvia s external demand in 2020, Germany shows no signs of sustainable economic improvement production output and. production capacity utilisation continue on a downward trend External uncertainty remains. a drag on exports nevertheless their level has slightly increased in the last few months For. the time being however unemployment remains low and data available for the third quarter. point to a slight retail trade increase suggesting a positive dynamics of private consumption. A more accommodative fiscal policy is still being discussed and it is not clear for how long. the domestic demand will be able to offset the external environment challenges Therefore. the EC has revised Germany s GDP growth forecast for 2019 slightly downwards from 0 5. in the spring forecast to 0 4 and from 1 5 in the spring forecast down to 1 0 for 2020. MACROECONOMIC DEVELOPMENTS REPORT 1 EXTERNAL DEMAND. December 2019, As regards our Baltic neighbouring countries they enjoyed stable growth in the first half of.
2019 also followed by signs of a slowdown later in the year In Lithuania economic growth. in the third quarter was negatively affected by the shrinking manufacturing output as a. result of the decreasing mining output At the same time the positive impact of the domestic. demand on growth persisted on the back of robust private consumption and investment. Estonia s economic growth continued on a sustainable path despite the negative external. environment developments Investment dynamics had a positive effect on its domestic. demand despite the robust consumption and the declining unemployment employment. expectations had become more pessimistic pointing to a slowdown in the economic growth. In autumn the EC revised upwards its 2019 GDP growth forecasts for both Lithuania and. Estonia from the previous 2 7 up to 3 2 and 3 8 respectively The previous 2020. forecast of 2 4 was revised down to 2 1 for Estonia while remaining unchanged for. For 2019 Latvia s non euro area trade partners are expected to register slower economic. growth than projected before Russia saw its economy grow faster in the third quarter albeit. still being sluggish overall The economic activity was further limited by the weakening. external demand having a negative effect on exports as suggested by confidence indicators. The slower than planned inflow of government investment in the national infrastructure. projects also weighed on growth The EC revised its 2019 GDP growth forecast for. Russia from 1 5 in the spring forecast down to 1 0 the 2020 forecast from 1 8 in the. spring forecast down to 1 4 To stimulate economic growth the Central Bank of Russia. repeatedly cut the key rate by 25 basis points without the fiscal stimulus however the. growth is likely to be slow and hence will also be reflected in a sluggish increase in imports. thus affecting Latvia s exports, As projected before the third quarter saw a growth slowdown continue in Poland on. account of the negative impact of the external environment on exports At the same time the. domestic demand remained the main GDP driver Private consumption was supported by low. unemployment and a wage rise as well as a rapid increase in private investment Meanwhile. government investment growth moderated as the use of EU funding contracted On account. of slower trade partner growth the EC revised Poland s previous GDP growth forecast down. from 4 2 to 4 1 for 2019 and from the previous 3 6 to 3 3 for 2020. Economic growth in Sweden albeit somewhat faster in the third quarter still remained. sluggish Despite the slightly higher unemployment rate private consumption increased. as wages and salaries rose However confidence indicators were still on a decline the. Purchasing Managers Index pointed to further problems in industry production capacity. utilisation had also contracted Export growth remained subdued and weak investment in the. housing market persisted therefore the EC revised Sweden s GDP growth forecast for 2019. downwards from the previous one of 1 4 to 1 1 and from 1 6 to 1 0 for 2020. Although the UK avoided slipping into a technical recession in the third quarter the. uncertainty associated with Brexit and the weak external environment continues to. dampen economic activity Manufacturing is stagnating and the number of job vacancies is. decreasing Meanwhile the wage rise continues to exceed inflation notably thus boosting. consumption The UK and the EU have reached a new agreement by extending the Brexit. deadline to 31 January 2020 The agreement will improve growth in the short term while it. is still unclear how the situation will evolve further Therefore the EC has left the UK GDP. growth forecast broadly unchanged, MACROECONOMIC DEVELOPMENTS REPORT 2 FINANCIAL CONDITIONS. December 2019,2 Financial Conditions, In response to weaker than expected economic activity both the ECB and the FRS. implemented measures to amplify their accommodative monetary policies At the current. juncture however markets no longer expect any further easing from the ECB whereas the. FRS has already announced no intention to continue with rate cuts in the near term Up. to October uncertainty primarily caused by the US China trade conflict weighed on the. financial markets Yet increasingly more positive news about the trade negotiations and a. decreasing probability of a no deal Brexit have brought more optimism to the stock markets. while the yields on debt securities are recovering from the record lows reported at the end of. 2 1 Decisions of the ECB and other major central banks. At its July meeting the Governing Council of the ECB decided to keep the key ECB interest. rates unchanged while its forward guidance suggested potential cutting at some point in the. future In addition to that the Governing Council tasked the respective committees of the. ECB with examining options to reinforce monetary accommodation and mitigate the adverse. effect of the negative interest rates on banks, At its September meeting the Governing Council of the ECB decided to act and take further. monetary easing measures First it decided to lower the interest rate on the deposit facility. by 10 basis points to 0 50 Forward guidance was modified stating that the Governing. Council of the ECB now expects the key ECB interest rates to remain at their present or. lower levels until the inflation outlook is seen to robustly converge to a level sufficiently. close to but below 2 within the projection horizon and such convergence has been. consistently reflected in underlying inflation dynamics Second the Governing Council. announced a restart of net purchases under the APP at a monthly pace of 20 billion euro. as from 1 November Asset purchases under the APP will run for as long as necessary to. reinforce the accommodative impact of the ECB s policy rates and they will end shortly. before the Governing Council of the ECB starts raising the key ECB interest rates Third. the principal payments from maturing securities purchased under the APP will continue. to be reinvested in full for an extended period of time past the date when the Governing. Council of the ECB starts raising the key ECB interest rates Fourth the Governing Council. decided to change the modalities of the quarterly targeted longer term refinancing operations. TLTRO III making the interest rate of these operations more appealing to banks as well. as extending the maturity of the operations from two to three years Fifth a new two. tier system for reserve remuneration was announced in which part of commercial banks. holdings of excess liquidity will be exempt from the negative deposit facility rate. Following the introduction of the above mentioned measures to increase the degree of. monetary accommodation the Governing Council of the ECB did not implement any further. significant changes in its monetary policy stance at the October meeting and left the key. ECB interest rates unchanged merely remarking that the previous decisions remain in effect. and net purchases at a monthly pace of 20 billion euro will restart as from 1 November The. start of the functioning of the previously announced two tier reserve remuneration system. was also confirmed At the press conference following the meeting Mario Draghi President. of the ECB pointed out that the incoming data since the Governing Council s meeting in. early September confirm the ECB s previous assessment of a protracted weakness in euro. area growth dynamics the persistence of prominent downside risks and muted inflation. pressures Mario Draghi mentioned that the slowdown in growth mainly reflects the ongoing. weakness of international trade in an environment of persistent global uncertainties which. continue to weigh on the euro area manufacturing sector and are dampening investment. MACROECONOMIC DEVELOPMENTS REPORT 2 FINANCIAL CONDITIONS. December 2019, In each of the three meetings held from July to October the Federal Open Market.
Committee of the FRS reduced the target range for the federal funds rate by 25 basis points. to 1 5 1 75 Making the last reduction at the end of October the FRS also signalled. that no further cuts can be expected in the near term The Chair of the FRS Jerome Powell. said that he believed that the full effects of the implemented rate adjustments on economic. growth will be realised over time In addition to that he confirmed that investment is. contracting yet the labour market remains strong and household spending which is the main. driver of the US economy continues to grow Financial markets have taken a similar view. and are currently not pricing in any new cuts of the target range for the federal funds rate in. a foreseeable future, There have been no changes in the monetary policy of the Bank of England since the. beginning of summer and it is still taking a wait and see approach At the November. meeting the Monetary Policy Committee pointed out that the economic growth has. been weak primarily reflecting Brexit related uncertainties and weak external demand. Nevertheless as a result of the Brexit extension successfully negotiated by Boris Johnson. the risks of a no deal Brexit have fallen This has allowed the Bank of England to become. more optimistic when projecting the results of 2020 Nevertheless the Bank of England. will be ready to respond should the reduced uncertainty fail to result in an improvement of. economic indicators Two out of nine members of the Monetary Policy Committee expressed. their preference to a cut in the Bank Rate already at the November meeting. MACROECONOMIC DEVELOPMENTS REPORT 2 FINANCIAL CONDITIONS. December 2019, No changes have been introduced to the Bank of Japan s policy rates and asset purchase. programmes since the beginning of June Yet at its end of October meeting the Bank of. Japan announced changes to its forward guidance stating that it is ready to introduce further. rate cuts In addition to that it was pointed out that the downside risks to economic activity. and prices were mainly associated with trade disputes between major overseas economies. Should those downside risks materialise the central bank will not hesitate to take additional. easing measures,2 2 Global financial market developments. From the beginning of June to early September sovereign bond yields in the advanced. economies decreased September was a volatile month for government bonds yet already at. the beginning of October the US China announcement of the imminent signing of Phase 1. trade deal triggered an upward movement in yields Overall the weighted average yield. on German 10 year government bonds declined by 15 basis points from the beginning of. summer to the end of November to 0 37 sinking as low as 0 70 just in the first days. of September The weighted average yield on comparable US Treasury bonds decreased. by 35 basis points to 1 74 also falling considerably lower at the end of summer to. 1 49 At the same time the weighted average yield on UK government bonds declined. by 9 basis points The steep dive of the bond yields over the summer months was explained. by the signals of further monetary easing coming from both the ECB and the FRS Yet. following the announcement the ECB September policy package and the subsequent press. publications revealing some internal opposition to the continuation of the APP it now seems. that most market participants consider the chances of continued monetary easing as limited. Deceleration of the US economy is also proceeding not as fast as projected by analysts. Moreover the yields are increasing supported by the progress made in the US China trade. deal negotiations Successful avoiding of a non agreement Brexit also means less downward. pressure on yields than at the beginning of September. The weighted average yields on French Italian Spanish and Portuguese 10 year government. bonds also fell by 26 142 30 and 40 basis points respectively In the case of Italian. government bonds the decline can be explained by the resolution of the domestic political. crisis in September with one of the previous populist government parties involved in a. heated debate with the EC about the acceptable size of its 2019 budget deficit being left. outside the governing coalition The yields on Spanish 10 year government bonds fell. as a consequence of the international rating agency S P Global upgrading the country s. sovereign rating from A to A while in Portugal s case it was a result of the same agency. revising the outlook on rating from stable to positive The most impressive fall in sovereign. bond yields was reported in Greece where the weighted average yield on 10 year government. bonds declined by 147 basis points A supporting factor was the fact that the centre right. party New Democracy of Greece gained majority at the national elections at the beginning. of July and this party is considered more investor friendly Moreover S P Global raised. Greece s sovereign credit rating from B to BB The spreads of other euro area government. MACROECONOMIC DEVELOPMENTS REPORT 2 FINANCIAL CONDITIONS. December 2019, bonds vis vis German government bonds narrowed in the reporting period suggesting that. investors believe that country specific risks have declined. Stock markets have been volatile since the beginning of June This was mainly a result. of the US China trade negotiations and negative economic news that scared investors. leading to temporary sell offs Stock markets were saved from an even stronger adjustment. by changes in the monetary policy stances of the ECB and the FRS US China Phase 1. trade deal announced in early October although still unsigned and in the process of being. negotiated in combination with further monetary easing measures adopted by central banks. slightly cheered up the stock markets US stock market index S P 500 has increased by. 14 6 since the beginning of June by 7 3 since the beginning of October reaching an. all time high S P 500 Banks index characterising the US banks rose most impressively. growing by 22 1 since the beginning of summer whereas Dow Jones Industrial Average. increased by 13 5 As regards bank stocks the good trading results reflect recovery from. the poor performance observed in spring when the derivatives markets just started to price. in the FRS cuts of the target range for the federal funds rate Another contributing factor. were the incoming data revealing a slower than expected deceleration of the US economy. Moreover the announcement made at the end of October that there would be no further cuts. of the target range for the federal funds rate in the near term has made investors even more. confident that bank stocks have previously been undervalued. European stock markets have also been volatile in the period under review Nevertheless. with minor adjustments the euro area stock prices have been growing already since the. mid August The euro area stock market index Euro Stoxx 50 has increased by 13 2 since. June while the STOXX Europe 600 index characterising Europe s overall market has picked. up by 10 8 The Euro Stoxx Banks index characterising the European banking sector has. climbed 8 5 The banking sector received support from the ECB through its introduction of. a two tier reserve remuneration system and improving the TLTRO III terms at the September. meeting of the Governing Council At the moment it seems that the financial markets do. not anticipate any further interest rate cuts from the ECB yet the weak euro area growth. prevents the stock prices from rising more substantially At the same time the UK stock. market index FTSE 100 increased by 3 1 and the UK banking sector index FTSE 350. Banks declined by 2 4 Although Brexit related risks have recently subsided they continue. to weigh on the UK stock market, Japan s stock market index Japan Nikkei 225 has grown by 13 1 in the period under.
review whereas the emerging markets stock index MSCI Emerging Markets has moved. up by 5 3 The future path of stock prices will mostly depend on geopolitical factors. i e finalisation of the announced US China Phase 1 trade deal which has already been. largely priced into derivatives Moreover the ultimate Brexit terms still remain unclear and. this is likely to cause some renewed stress in financial markets when the exit deadline of. 31 January draws nearer Also in the absence of more robust corporate profit growth the rise. in stock prices will be unsustainable and the former will depend on the global economic. The exchange rate of the euro against the US dollar has decreased by 1 6 since the. beginning of June to 1 099 US dollars per euro The euro s depreciation against the US. dollar reflects deceleration of the euro area s economic growth which was stronger than. expected At the same time despite slowing down the US economy is still growing at a solid. pace Another factor contributing to the rise of the US dollar was the uncertainty surrounding. the US China trade arrangement with investors giving preference to safer US dollar assets. Meanwhile the mounting concerns over a no deal Brexit had a downward effect on the. exchange rate of the euro Looking into the future analysts believe that the euro is getting an. upward pressure from the internal resistance within the ECB to additional monetary easing. Yet the FRS has also announced that no further cuts of the target range for the federal funds. MACROECONOMIC DEVELOPMENTS REPORT 2 FINANCIAL CONDITIONS. December 2019, rate can be expected in the near term The most recent positive news concerning the US. China trade negotiations and the declining probability of a disorderly Brexit are the factors. supporting appreciation of the euro That being said the actual development will rather. depend on whether the euro area economy has already reached the trough. 2 3 Conditions for financing the Latvian economy, Overall so far Latvian credit institutions have failed to make full use of the advantages. provided by the accommodative monetary policy pursued by the ECB The effect of economic. deceleration on the developments in monetary aggregates annual rate of change of received. deposits and granted loans has so far been limited Nevertheless the external risks and the. slowdown of growth will continue to weigh on lending while caution in assessing the future. prospects will stimulate accumulation of savings with businesses and households increasing. their current account deposits The level of interest rates offered by credit institutions. remained favourable for lending development Monetary policy measures implemented. by the ECB will ensure favourable development of lending conditions and support their. improvement At the same time the lending conditions are increasingly more affected by the. ability of credit institutions that were previously focussed on non resident business to find a. At the moment lending is not an economic growth supporting factor yet Financing is. available and its costs are low yet credit institutions are holding over 4 billion euro of. their excess liquidity with the central bank instead of channelling into the real economy to. improve economic competitiveness and stimulate domestic demand Monthly developments. in outstanding loans have been volatile and the annual rate of increase in the domestic. loan portfolio remained low 1 9 in October including 3 5 for loans to non financial. corporations and 0 8 for household loans The amount of new loans was also unchanged. Loan to GDP ratio continued to shrink with the ratio of loans to domestic non financial. corporations and households declining to 39 6 of GDP at the end of the third quarter. of 2019 41 6 of GDP at the end of the third quarter of 2018 Non bank lending also. decelerated at the end of June 2019 the growth rates of non bank loans to non financial. corporations and households were merely 2 2 and 11 9 respectively. MACROECONOMIC DEVELOPMENTS REPORT 2 FINANCIAL CONDITIONS. December 2019, From May to October domestic loans to non financial corporations and households overall. increased by 1 1 rising by 0 3 in the third quarter Despite the sluggish growth rate. lending to households has been much more stable than lending to non financial corporations. This was determined by the steadily growing household loans for house purchase 1 8. in annual terms October was already the 15th consecutive month when an increase of this. particular loan portfolio was reported inter alia supported by the government s housing. guarantees programme as well as expanding consumer credit 3 0 in annual terms in. The financing costs of Latvia s credit institutions on the domestic deposit market remained. broadly unchanged Interest rates on domestic deposits the main financing source of credit. institutions increasingly approached zero yet remained positive In October 2019 the. interest rate on euro deposits of domestic non financial corporations and households stood at. 0 06 0 08 in April 2019 Meanwhile the interest rates on new fixed term euro deposits. by non financial corporations and households were 0 00 and 0 4 respectively 0 03. and 0 5 in April 2019 Deposit rates could be potentially affected by the ECB s decision. of 15 September 2019 to lower the deposit facility rate by 10 basis points to 0 50. Nevertheless the effect of this decision is limited by the fact that Latvia s credit institutions. are reluctant to apply negative rates on small deposits to prevent accumulation of cash. MACROECONOMIC DEVELOPMENTS REPORT 2 FINANCIAL CONDITIONS. December 2019, savings The low level of deposit rates also enables Latvia s credit institutions to offer loans. to domestic non financial corporations and households on relatively more attractive terms. At the same time lending is also influenced by factors like the lending policies pursued. by particular credit institutions and their financial strength costs of other sources of credit. institution financing and borrowers risk profile As a consequence Latvia as well as the other. two Baltic states range among euro area countries with the highest average interest rates. Availability of loans to non financial corporations slightly deteriorated in the second quarter. of 2019 In the third quarter however with the demand from non financial corporations. contracting as well as the ECB announcing further monetary easing major Latvia s credit. institutions overall reduced their lending rates to non financial corporations At the same. time credit institutions that were previously mostly focussed on non resident business. started to grant more loans to domestic non financial corporations at higher interest rates. In their responses to the euro area bank lending survey covering major Latvia s credit. institutions a couple of credit institutions reported tightening of individual credit terms. and conditions applied to loans to non financial corporations in the second quarter of 2019. one of them mentioned margins whereas the other one referred to collateral requirements. and other contract terms At the same time one of the four surveyed Latvia s credit. institutions reported a slightly lower demand for large loans to non financial corporations. Nevertheless in the third quarter already three respondent credit institutions reported lower. demand for long term loans to non financial corporation quoting lower need for long term. investment deterioration of economic outlook and loans from other credit institutions as. the underlying reasons Demand for loans to non financial corporations contracted at the. time when the ECB announced several additional measures to stimulate the economy. Interest rate statistics show that the interest rate on new euro loans in four Latvia s credit. institutions with the biggest portfolios of loans to non financial corporations decreased by. 0 2 percentage point to 3 0 in the period under review Nevertheless in the third quarter. of 2019 several credit institutions that were previously focussed on non resident business. announced their intention to step up lending to domestic non financial corporations In other. credit institutions the interest rate on new euro loans to non financial corporations rose by. 1 0 percentage point to 3 9 in the period under review with the share of those loans in. total new business also increasing Availability of financing to non financial corporations. in Latvia is dependent on their risk scores and the proportion of risky loans in new loans. has a significant effect on the weighted average interest rates on loans to non financial. corporations In the next reporting period the interest rates on loans to non financial. corporations will be affected by the following counteracting factors on the one hand the. continued transmission of further monetary easing implemented by the ECB on the other. hand riskier non financial corporations will find it easier to draw more expensive financing. from specialised credit institutions, Financing conditions for loans to households for house purchase remained broadly.
unchanged in the reporting period The monetary policy measures implemented by the. ECB supported a decline in interest rates Because of competition credit institutions had.


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