RIGA - Although inflation spiked in 2004, Latvia should still become a full member of the European Economic and Monetary Union and introduce the euro later this decade, Standard & Poor's reported last week.
"There is a broad cross-party consensus on the objective of joining the euro zone in 2008, which was confirmed by Prime Minister Aigars Kalvitis in early December," Standard & Poor's credit analyst Remy Salters said. "Moreover, the country has so far maintained a strong track record of prudent macroeconomic policy and adherence to EU membership requirements, leaving little reason to doubt that it will act with equal focus to meet EMU convergence criteria."
After a strong performance in terms of fighting inflation and maintaining price stability in the past decade, Latvia's inflationary indicators in recent months have diverged sharply from EMU targets. The consumer price index peaked in August at 7.8 percent year-on-year.
To qualify for full EMU membership on Jan. 1, 2008, Latvia will need to be assessed for compliance with the Maastricht requirements by the third quarter of 2007. The average inflation rate in the 12 months leading up to the assessment must not exceed the average of the three lowest-inflation EU member states by more than 1.5 percentage points. In October 2004, this equated to a reference rate of just 2.1 percent year-on-year.
"The realistic worst-case scenario would be a brief postponement of full EMU entry to January 2009, with inflation still overshooting marginally by year-end 2007. We believe, however, that if inflation does not abate significantly, the Latvian government is likely to adopt whatever measures are needed to bring the headline rate into compliance for a 2008 entry," said Salters.
In 2005 Latvia will re-peg its national currency from the SDR basket to the euro.