a favourable impact on savings and investments in latvia, thereby strengthening the country ’ s financial system in the long run. • the central bank ’ s focus on price stability enhances long - term planning and hence improves the process of resource allocation over time, thus contributing to a more efficient functioning of the economy. for these purposes it can use monetary policy instruments to smooth out excessive interest rate fluctuations and influence money supply in the short run. hence, the bank of latvia will influence and at a certain level control the financial system through existing monetary policy instruments : • first : reserve requirements. reserve requirements facilitate implementation of monetary policy and to some extent create liquidity reserves that help to stabilize interbank rates. on the down side, reserve requirements can act as a strain on commercial banks and thus limit financial intermediation. in line with latvia ’ s economic development and to narrow the spread between deposit and lending rates, the bank of latvia has, step by step, lowered reserve requirements. as a result, the required reserve ratio has been reduced to 6 %, and in the future will be targeted to gradually reach the 2 % level currently set by the european central bank. • second : open market operations. the bank of latvia currently has the same set of open market instruments as the ecb, and the most actively used instruments are swap and repo operations. the widespread use of swap operations was dictated by commercial banks ’ desire to use their foreign currency holdings as a collateral for central bank ’ s loans. however, as the market for government and corporate securities develops over time, it is expected that traditional repo operations will progressively become more important. by regulating liquidity in the banking sector through open market operations, the bank of latvia can influence interest rates in the interbank market. insofar as the lending rates to the non - banking sector respond to changes in the interbank market rates, the actions of the central bank can have implications for the real sector of the economy. • third : lender of last resort. if temporary economic difficulties of a financial institution can threaten the stability of the whole financial system, the bank of latvia is entitled to provide emergency financial support. according to the law “ on the financial and capital market commission ”, the commission is “ authorised to request the bank of latvia to extend a loan against collateral to any credit institution with short - term liquidity problems. ” the latvian law clearly separates the function of the lender of last resort from banking supervision. although the law stipulates

be devalued, the burden on those loan recipients whose liabilities are in euro but income in lats would increase dramatically : it would take more money to buy a euro. anyone who speculates, albeit theoretically, about devaluation of the lats, should be aware that it would lead to a dead - end. whereas foreign experts keep devaluation in mind as an instrument that can be applied if necessary to restore the ability to compete, my opponent goes much further than that : he claims that devaluing the lats is unavoidable under the conditions of excessive inflation and loss of ability to compete. on the contrary : a stable and unchangeable lats exchange rate in under such conditions serves and will continue to serve as an automatic stabilizing and inflation - suppressing factor. i would also like to remind any hotheads that only the bank of latvia can make the decision to devalue : not the government. during my tenure as the chief officer of the bank of latvia it will not happen. on 31 january, the foreign currency reserves of the bank of latvia amounted to 2. 4 billion lats. the bank ’ s foreign reserves exceed the amount of lats in circulation and thus we would be quite ready and able to exchange even the entire amount of lats in circulation for foreign currency in accordance with the exchange rate as set by the bank. mr. hansen is fully aware of this. in conclusion, i would like to express confidence that the discussion about balanced development of the latvian economy in the long term will continue and that the set of measures that will be undertaken in march under the auspices of the minister of finance and aimed slowing down inflation will prove successful.