OREANDA-NEWS. On October 18, 2007 the Chairman of the Board of the Bank of Lithuania, Reinoldijus Sarkinas delivered a Bank of Lithuania report on the implementation of its primary objective, the performance of its functions, and the state of the banking system in the first half of 2007 to the Seimas of the Republic of Lithuania. The report also gave an overview of the Lithuanian economy and price developments, reported the press-centre of Bank of Lithuania. 
 
The report stated that both annual and average annual inflation increased in Lithuania in the first half-year. The inflation was mainly driven by persistently strong increases in processed food prices. The increases are significantly affected by the rising purchasing prices of agricultural products (of grain in particular) which, in turn, are also driven by corn price increases in global markets as a result of increased demand for cereals and their intensified use for the production of biofuels. The wage growth outpacing productivity growth and the rising commodity (wood, gas) prices continue exerting upward pressures on the producer prices of industrial goods. However, with the domination of imported goods in the consumer basket (except for food and fuels), the impact of the producer prices of these goods on the growth of consumer prices continues to be limited. General inflation has been increasingly stronger affected by service price increases, and these are driven by growing labour costs and persistently growing demand. Together with further increasing food prices, this is likely to determine the rise of inflation in the near term as well.

Since 28 June 2004, Lithuania has been participating in the Exchange Rate Mechanism II and fulfilling its unilateral obligation to maintain a fixed exchange rate regime and a stable exchange rate of the litas against its anchor currency, the euro. The monetary policy instruments applied by the Bank of Lithuania aim at maintaining a stable litas exchange rate against the euro and help ensuring appropriate liquidity in the banking system.

The part of the report devoted to the operation of credit institutions has noted that the domestic banking sector continued expanding in the first half-year. The development of banks was highly influenced by the strong dynamics of Lithuania’s economy. Loans to residents for house purchase and consumption continued to increase. However, the growth of the loan portfolio is hindered by the tightening of conditions for granting loans by banks, the rising basic interest rates, and the strict assessment of the credit risk of the domestic market and of the markets in the region.

The loan portfolio quality ratios of banks are good. With the strong growth of the loan portfolio of banks, both the ratio of loans whose regular payments were 60 days and more overdue to the loan portfolio, and the ratio of loan value impairment (specific provisions) to the loan portfolio decreased.

Allocating their retained profit of 2006 and of the previous year, bank shareholders took into account the Bank of Lithuania’s call to pay more attention to forming adequate reserves for decreasing their likely losses, and to strengthen their capital base. The latter is currently sufficient for reducing the risks assumed.

Reinoldijus Sarkinas answered the questions of members of the Seimas.
 
The Chairman of the Board of the Bank of Lithuania delivers reports at the Seimas of the Republic of Lithuania twice a year.