RIGA - Faced with an inexorable climb in consumer prices, the Bank of Latvia announced last week that it had raised its 2004 inflation forecast to 4.5 percent, or half a percentage point higher than its original estimate.
Bank of Latvia President Ilmars Rimsevics said that consumer price growth over the months of March and April, driven mainly by accession-related speculation, had exceeded the bank's forecast. The consumer price index in April alone grew 5 percent year-on-year, putting the average annual inflation for the January-April period at 4.5 percent.
Remarkably, for certain goods and services the average price increase in the first four months of the year was 12.8 percent compared with the same period last year.
In his words, bank specialists factored in an increase of oil prices and prices subject to administrative regulation in calculating the new inflation forecast.
Rimsevics defended the bank's change by explaining that those factors that could not be predicted in advance - e.g., popular speculation and rumor regarding possible postaccession price changes, thereby increasing demand for certain goods and prompting businesses to raise prices for these goods. What's more, high metal and oil prices are forcing many industries and businesses to raise the prices of their goods and services.
The central banker said that while Latvia was posting inflationary levels higher than those allowed for in the Maastricht criteria, for the time being the price raises will not be a matter of contention. In 2006, however, the government and the Bank of Latvia could have a problem, since adherence to the criteria will be strictly evaluated.
Currently inflation is the Maastricht criteria of which Latvia is in violation.
Meanwhile, analysts at Latvia's Hansabanka announced this week that Estonia would post the highest inflation among Baltic states in 2004.
Hansabanka wrote in its Baltic macroeconomic survey that Latvia would have 5.5 percent, Estonia 4.9 percent inflation and Lithuania 1.2 percent.
"If inflation in Latvia is likely to slow down in the second half of the year, the price growth in Estonia and Lithuania could only accelerate. In general, inflation will remain at moderate levels, not rising above 5 percent in the next couple of years," wrote the banks' analysts.
According to the Latvian statistics office, so far Latvian consumer prices are rising faster than those in Estonia, while prices in Lithuania are even decreasing.
In April Estonia registered a 1.3 percent rise in prices, but Lithuania had a 0.6 percent deflation.
"While the average price level in Estonia and Lithuania is influenced by the strong euro - i.e., inflation stays low due to cheaper imports, Latvian inflation will remain comparatively higher throughout 2004 over high domestic demand and optimistic consumers, who do not care much about rising prices," said Hansabanka.
Hansabanka also expects Estonia to post the highest inflation in 2005, at 4.1 percent. 2005 inflation in Latvia is forecasted at 3.3 percent and in Lithuanian at 2.3 percent.
