Meeting of the Board of the Bank of Lithuania
1. The Board reviewed the report on the investment of foreign reserves in the first half of 2002. During the first half of the year international reserves went up by EUR 493.1 million, i.e. 26 percent. The change in foreign reserves over the review period was the largest since 1992. The key factor
1. The Board reviewed the report on the investment of foreign reserves in the first half of 2002.
During the first half of the year international reserves went up by EUR 493.1 million, i.e. 26 percent.
The change in foreign reserves over the review period was the largest since 1992. The key factor contributing to this change was increased liabilities to Bank of Lithuania depositors, of which the Ministry of Finance was the largest. The increase of balances held at the central bank was mostly related to inflows from a new Eurobond issue.
Domestic factors determined net sales of the anchor currency by commercial banks to the Bank of Lithuania of EUR 200.8 million, which served as the second most significant factor for positive changes in the volume of foreign reserves. The positive balance of litas and anchor currency exchange transactions during the review period was the largest since 1994.
Net inflows from foreign reserve investment pushed foreign reserves up by EUR 30.2 million. An additional EUR 17.0 million growth of foreign reserves was determined by changes in foreign exchange rates and gold prices.
Commercial bank reserve requirements went down by EUR 31.6 million during the review period. The decline was determined by the reduction of the reserve requirement ratio from 8 per cent to 6 per cent earlier in May this year.
During the first half of 2002 foreign reserves held in the previous anchor currency, the US dollar, were converted into the euro, the new anchor currency. Thereby the share of the euro increased from 9.5 per cent in late December last year to 96 per cent at the end of February.
2. The Board reviewed the report on the global economic development in the first half of 2002.
During the period, economic growth in the key regions of the global economy was weaker than expected. This determined further decline of inflation and growth of unemployment.
During the first quarter of the year US economy showed robust growth, but the second quarter brought uncertainty in relation to further development. As expected, the reduction of stocks gave the strongest impulse to the economy, along with rather stable and strong household spending. US inflation went down to record lows, inflation reached the highest level since 1994, while the Federal Reserve interest rates remained the lowest in more than 40 years.
In the euro area, continued weakening of investment and lower household consumption growth were the primary causes for weak economic performance. Slow economic growth pushed up unemployment and decelerated inflation. At the end of the period inflation went below the ECB target. The above reasons as well as uncertainty about economic prospects were the key factors for leaving the ECB interest rates unchanged.
In Japan, accelerated investment decline, weak household consumption and continued trends of slowing exports and imports determined GDP decline that has continued for four consecutive quarters. The rate of unemployment remained at record high levels, while deflation has continued for a third year.
The period was changeable for financial markets. Close ties between financial markets and dependence on the US were especially evident in stock markets. Better than expected corporate results and expectations of economic recovery pushed stock prices up at the beginning of the year. However, accounting scandals in the US in the second quarter damaged confidence in stock markets. The key indices tumbled down by 7.8 to 24.9 per cent from the levels at the start of the year. Similar trends also prevailed in euro area and Japanese stock markets, mostly influenced by the events in the US.
The wave of stock sales was one of the primary reasons for the weakening of the US dollar. Other unfavourable factors were reviewed US economic prospects, widening current account deficit, tension in the Near East and the threat of terrorist attacks on the US. The US dollar exchange rate declined in relation to most currencies.
The weakening of the dollar and political tensions brought gold prices up. By the end of May gold prices reached the highest level in over four years.
The growth of oil prices was supported by lower supply and increased accumulation of oil reserves.