Officials ponder inflation specter

  • 2004-09-29
  • Staff and wire reports
RIGA - Inflation remained the topic of debate in Latvia, with government officials raising their annual forecasts yet again and economists warning that consumer prices are set to rise further.

The Finance Ministry announced that it has raised its 2004 inflation forecast from 5.5 percent to 6.3 percent, numbers that are included among the macroeconomic indicators in the 2005 draft budget. At the same time the ministry expects inflation to drop to 4.3 percent in 2005, then to 3.2 percent in 2006.

The Bank of Latvia, which criticized the government for additional expenditures, recently raised its inflation forecast to 7 percent. The annual inflation rate in August reached 7.8 percent, the highest rate since 1997.

Bank of Latvia President Ilmars Rimsevics, speaking at a conference last week, said the bank believed inflation would drop to 4.5 percent next year. He reiterated that inflation was one of the risks that could lead to a delay in the introduction of the euro.

Central bank monetary policy department official Martins Bitans said that inflation has been fueled by many expected factors 's administrative regulation and psychological expectations ahead of EU accession 's though there were factors that would not decrease significantly over the coming years 's e.g., strong domestic demand.

Both Rimsevics and Bitans noted that in order to reduce inflation in the current climate of high demand, the government should pursue a tight fiscal policy; one that envisages a sizable reduction of the fiscal deficit.

Rimsevics voiced a conviction that Latvia would meet all the required Maastricht criteria for introduction of the euro by 2006 and would receive a positive evaluation from EU institutions in 2007, thus introducing the European currency in 2008.

Meanwhile, the National Agricultural Economy Institute said that food prices would continue to grow in the near and distant future.

Andris Miglavs said that in contrast to previous price-rises, those in the future would occur as a result of higher living standards and not because of agricultural production, which has exhausted possibilities of a price increase.

Commercial Banks Association President Teodors Tverijons has confirmed this view, saying "prices in Latvia will grow regardless of what the Bank of Latvia wants." He added that the introduction of the euro should not be an end in itself, and that it does not really matter if it happens in 2008 or 2010.