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Sunday 04.12.2016 | Name days: Baiba, Barba, Barbara
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Economic Diary of Latvia. Storm warning

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThis week, the European Central Bank had unexpectedly reduced all three interest rates – for loans, deposits and margin loans. The base interest rate for loans has been reduced to 0%. Lenders who have outstanding debts in euro can expect a reduction for their monthly payments. Looking at this process from the perspective of Eurozone’s future, it will not be good.

According to analyst Neil Jones from Mizuho Bank, the market is ruled by shock and rapture. Draghi [Mario Draghi] has surpassed all expectations, and those expectations were quite high. Euro continues getting cheaper. It is possible this tendency will continue.

ECB has reduced the loan interest rate from 5 base points to 0. The Deposit interest rate has been reduced from -0.3% to -0.4%. The interest rate for margin loans has been reduced from 5 base points to 0.25% annually.

Furthermore, ECB has increase the volume of monthly asset buybacks as part of the quantitative easing programme from EUR 60 billion to EUR 80 billion starting from April.

Experts interviewed by Bloomberg predicted a reduction of the rate for deposits to 0.4%. No one had expected reductions of other rates. They had also predicted an increase of QE by EUR 15 billion a month to EUR 75 billion.

In reality, decision made during the March meeting of ECB mean that monetary-loan stimuli have been mostly exhausted. Rates have been reduced to 0 or more, and it is impossible to endlessly keep increasing the influx of money.

Central banks can create all the conditions for stimulation of economic growth in the global economy, but they cannot create growth, believes David Lafferty, chief market strategist-analyst of Natixis Global Asset Management. According to him, negative interest rates could result in what happened in Japan following the reduction of interest rates in January. Advantages of a policy of negative interest rates are few and side-effects are unpredictable, he says.

The Bank for International Settlements had previously warned about ‘the coming storm’ in the world’s economy. This storm was partially caused by governments of the world hoping to develop different options for the monetary-loan policy. The bank’s economists had reported that negative interest rates would become a reality for many countries, as central banks continue looking for options to maintain grown and overcome the declining oil prices.

Bloomberg experts believe tax-budget policy should be put on first place as priority, as credit-monetary stimuli have been effectively exhausted at this point. This is why governments have to develop an adequate tax-budget response.

Budget and taxes

Coincidence or just the foresight of the Latvian government, but the meeting of the finance minister and social partners – Latvian Employers’ Confederation and Latvian Union of Free Trade Unions – took place this week. The sides discussed, among other things, the development of a new tax policy. Dana Reizniece-Ozola mentioned during the meeting that it is necessary to reduce advantages provided by the shadow economy, review the budget’s expenditure positions and assist businessmen.

Earlier, in February, the government had approved the schedule for the preparation of the state budget for 2017. In accordance with this schedule, the package of budget documents should be submitted to the Saeima by 14 October. This year, the Cabinet of Ministers began its work on the draft for the state budget for 2017. It is already known, that the base expenditure of the government will be EUR 6 billion, which is EUR 38.3 million lower in comparison with expenditure approved as part of the draft On the threshold of the medium-term budget for 2016, 2016 and 2018.

Such a level of responsibility and organization when tackling budget matters is not something previous Latvian governments had.

The need to carefully follow expenses of the state budget and be prepared for corrections is also mentioned by SEB Bank in its latest economic outlook.

In general, the bank views Latvia’s perspectives as positive, but adds that development will be limited due to geopolitical tension.

Women in business

This week, progressive mankind celebrated the International Women’s Day. On the eve of this day, Amway published results of the latest global survey of business activity. One of the objectives of this survey was to find out the reasons behind Latvian women’s desire to open their own business. As it turned out, independence is the main motivating factor for opening a business – 47% of women in Latvia mentioned it.

Around 43% of women are interested in business as a source of additional income. For one-third of respondents, it is an option to combine career with family and leisure. 37% mentioned that starting a business allows them to realize themselves and their ideas.

«Latvian women are some of the most opportunistic in Europe. They are much more positive about business than men. Although business indexes among women in Latvia are already high, they can be improved even more. If we turn to women who fear the lack of success and change their views, it will have a significant positive impact on the country’s economic growth,» – said Professor Anders Palsovs.

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