Latvijas Banka 6 June 2014 Press Conference - Presentation Slides

Presentation of Ilmārs Rimšēvičs, Governor of Latvijas Banka,

delivered at 6 June 2014 Press Conference.

Growth resumes in the euro area, but recovery is still fragile

2

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

20

10

Q1

20

10

Q2

20

10

Q3

20

10

Q4

20

11

Q1

20

11

Q2

20

11

Q3

20

11

Q4

20

12

Q1

20

12

Q2

20

12

Q3

20

12

Q4

20

13

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

14

Q1

Quarterly growth (%) Annual growth (%)

Changes in euro area real GDP, %

Source Eurostat

Low inflation persists in the euro area

3

0

0.5

1

1.5

2

2.5

3

3.5

20

10

Jan

20

10

Mar

20

10

May

20

10

Jul

20

10

Sep

20

10

No

v

20

11

Jan

20

11

Mar

20

11

May

20

11

Jul

20

11

Sep

20

11

No

v

20

12

Jan

20

12

Mar

20

12

May

20

12

Jul

20

12

Sep

20

12

No

v

20

13

Jan

20

13

Mar

20

13

May

20

13

Jul

20

13

Sep

20

13

No

v

20

14

Jan

20

14

Mar

20

14

May

Euro area inflation (HICP), %

Source: Eurostat

Problem countries of the euro area can borrow at ever lower rates

4 Source: Eurostat

0.00

5.00

10.00

15.00

20.00

25.00

30.00

20

11

M0

1

20

11

M0

4

20

11

M0

7

20

11

M1

0

20

12

M0

1

20

12

M0

4

20

12

M0

7

20

12

M1

0

20

13

M0

1

20

13

M0

4

20

13

M0

7

20

13

M1

0

20

14

M0

1

20

14

M0

4

6.20 Greece

3.82 Portugal 3.23 Italy 3.11 Spain 2.90 Ireland

1.46 Germany

Budget balances have improved markedly since the crisis (debt servicing not included)

5

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

Irel

and

Port

uga

l

Cyp

rus

Fran

ce

Mal

ta

Slo

ven

ia

Spai

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Bel

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Slo

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The

Net

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lan

ds

Au

stri

a

Latv

ia

Ital

y

Fin

lan

d

Esto

nia

Ger

man

y

Luxe

mb

ou

rg

Gre

ece

2010

2013

Strukturālā budžeta bilance. Avots: EK

38.1

0

20

40

60

80

100

120

140

160

Gre

ece

Ital

y

Be

lgiu

m

Port

uga

l

Ge

rman

y

Fran

ce

Mal

ta

Au

stri

a

Cyp

rus

The

Net

her

lan

ds

Spai

n

Fin

lan

d

Slo

vaki

a

Irel

and

Slo

ven

ia

Latv

ia

Luxe

mb

ou

rg

Esto

nia

2007 2013

Growth in the indebtedness of some euro area countries is worrisome

Avots: Eurostat

Limit of stability and growth pact = 60%

6

The ECB’s policy of low interest rates has not been passed through to the real economy

7

3.13

0

1

2

3

4

5

6

7

Cyp

rus

Gre

ece

Mal

ta

Port

uga

l

Slo

ven

ia

Ital

y

Slo

vaki

a

Spai

n

Ge

rman

y

Latv

ia

Irel

and

The …

Be

lgiu

m

Esto

nia

Fran

ce

Au

stri

a

Luxe

mb…

Som

ija

Interest rates of loans granted by banks to non-financial businesses in the euro area countries in March 2014 (%)

Source: ECB

ECB benchmark rate 0.25%

At the June 2014 meeting the Governing Council further reduced the key ECB interest rates

0.00% -0.10%

* šādā līmenī kopš VII 2012

Deposit facility rate

0.25% 0.15%

Main refinancing operations rate

0.75% 0.40% Marginal lending facility rate * šādā līmenī kopš XI 2013

* šādā līmenī kopš XI 2013

In addition, the Governing Council adopted a number of other measures

o New targeted longer term refinancing operations(TLTRO):

- to support bank lending to households and non-financial corporations

- attractive interest rates

- some 400 billion euro

- as of September 2014

o Continue conducting the MROs as fixed rate tender procedures with full allotment at least until December 2016.

o Suspend the weekly fine-tuning operation sterilising the liquidity injected under the Securities Markets Programme.

o Intensify preparatory work related to outright purchases in the asset based securities (ABS) market, should it become necessary in the future.

o GovC is unanimous in its commitment to using also unconventional instruments within its mandate should it become necessary

o Changed forward guidance– the key ECB interest rates will remain at present levels for an extended period of time.

9

With the GDP growth rate falling, Latvia is still the fastest growing economy in the euro area

10

2.4

-4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5

Latv

ia

Ger

man

y

Slo

vaki

a

Bel

giu

m

Port

uga

l

Au

stri

a

Fran

ce

Spai

n

Ital

y

The

Net

her

lan

ds

Fin

lan

d

Gre

ece

Esto

nia

Cyp

rus

GDP growth in the first quarter of 2014, %, seasonally adjusted data; source: Eurostat

Exports grow overall, yet export to Russia falls

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Y-o-Y changes in Latvian goods exports (%)

Total exports (%) Exports to Russia (%)

-1.8%

+6.1%

11

Proportion of goods exports to Russia in total Latvian exports

11.5%

2013.data

Source: CSB

The Bank of Latvia’s GDP forecast for 2014

12 Source: LB

Previous forecast

Current forecast*

4.0% 3.3%

* adjusted in mid- 2014

Inflation level reflects moderate growth; the negative contribution of supply side factors diminishing

13

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

I 2

01

2

II

III

IV

V

VI

VII

VII

I

IX

X

XI

XII

I 2

01

3

II

III

IV

V

VI

VII

VII

I

IX

X

XI

XII

I 2

01

4

II

III

IV

Contribution of food prices in y-y changes in inflation

Contribution of energy prices in y-y changes in inflation

Total inflation (%)

Core inflation (%)

Source: CSB, LB calculation

Contribution of energy and food prices in the annual inflation(pp), core inflation (%)

national consumer price index

The Bank of Latvia’s inflation forecast for 2014

14 Source: LB

Previous forecast

Current forecast*

1.7% 1.1%

* SPCI; forecast adjusted in mid-2014.

LB and FM budget deficit forecasts for 2014 (% of GDP)

15

-1.0 -1.0

-0.3

-0.2

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

% n

o IK

P

-1.5%

Source: Latvia’s Stability Programme 2014-2017; LB estimates

Budget deficit planned by

Ministry of Finance

Current budget deficit

forecast by LB FM planned budget

deficit

Budget deterioration

because of lower

economic growth and

increased expenditure

Budget deterioration as a

result of EKS adjustment

Budget deficit has been shrinking every year since the crisis. We must not repeat the mistakes of the boom years!

16

-4.4

-9.2

-8.2

-3.5

-1.3 -1

-1.5

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

2008 2009 2010 2011 2012 2013 2014

% n

o IK

P

Source: Eurostat; 2014 LB estimates

Balance of general government budget

(Prognoze)