Bank of Lithuania prepares for move into equities

The Bank of Lithuania is to invest its reserves "more flexibly" in search of higher yields, including through purchases of highly-rated equities, the central bank has revealed.

"The return on one major source of foreign reserve asset management – exclusively safe government securities – has decreased in recent years and currently is close to zero," said Mindaugas Vaičiulis, the director of the Bank of Lithuania's banking service.

"In order to invest foreign assets more effectively and achieve greater risk diversification, it is necessary to revise the management principles of these funds," he said.

Consequently, the Bank of Lithuania will now invest part of its reserves in debt and equities of corporations with investment grade ratings, as well as longer-term government bonds that will deliver a higher return.

Vaičiulis said a number of other central banks in central and eastern Europe had taken similar decisions. He referred to the latest edition of the RBS Reserve Management Trends, published by Central Banking Publications, which found that eight central banks are already investing in equities, and four more are considering such a move in the next five years.

In a statement, the central bank said the move had come both in response to "recent developments in the European and global economy" and to recommendations made by the World Bank.

The Bank of Lithuania currently holds foreign exchange worth approximately $7.5 billion, of which around $5.3 billion is invested in securities. The remainder is held as currency and deposits, with the Bank for International Settlement or International Monetary Fund (IMF), and with banks. The central bank also holds 187,000 troy ounces of gold, currently worth approximately $238 million.

In addition to equities, central banks appear to have a greater appetite for less traditional reserve currencies. Reserve Management Trends highlighted a particular move towards Australian or Canadian dollars, a trend supported by the IMF's latest Cofer data.

The changes to the Bank of Lithuania's reserves management strategy will be gradually introduced starting on November 30.