Lat pegged to euro at 'high' rate

  • 2005-01-06
  • From wire reports
RIGA - On Jan. 1 the Latvian lat was pegged to the euro at a rate of 0.702804 lat to 1 euro as the currency was finally detached from the currency basket and joined the SDR mechanism as part of the obligatory process for adopting the euro. Analysts, however, said the rate was high and would have an impact on trade.

The Bank of Latvia announced that the final rate was calculated on the basis of market rates fixed by the European Central Bank on Dec. 30. Bank spokesman Martins Gravitis said the bank would ensure that the lat-euro rate fluctuated less than 1 percent of the central peg rate beginning Jan. 1.

"It means that the present corridor for fluctuations of the lat against the peg currency will be retained, which is clear and customary for financial markets. Thus, the fixed exchange rate regime that has served well for Latvia's small and open economy will not change," said Gravitis.

The Bank of Latvia will set the exchange rate of the lat against other currencies according to the lat-euro rate and exchange rates of the world's currencies at a given moment, he added.

Meanwhile, analysts said the actual lat-euro rate was high and said it would benefit exporters to EU countries, while importers would be worse off.

Andris Vilks, a market analyst at Latvijas Unibanka, said the rate was high. "On an everyday level, of course, it seems unprofitable, as we all will have less euros, and imports from the eurozone will be more expensive." He said winners would include Latvian companies exporting to EU states since transactions are mainly made in euros or in currencies pegged to the euro. However, trade in traditional U.S. dollar zones, including the CIS states, Asia and the United States, will be less profitable at the established rate if businesses use raw material purchased with lats and euros.

Still, he added it was too early to say how the rate would play out in a couple of years' time, since short-term losses often constitute sustainable long-term gains.

Vilks said it was important that there was no more currency risk against the lat since the common currency's role was set to increase each year.

Andris Ozolins, president of Nord/LB Latvija, said the role of the repegging in promoting exports should be regarded as positive. "Latvia's exporters will be in a very good situation given that prices of goods made in Latvia will be relatively low in the EU states amid the low rate of lat against euro," he said.

He said that most Latvians, who receive their incomes mainly in lats, may feel the negative effects of the repegging. "As imported goods will grow relatively more expensive, inflation will rise and people's real income and their purchasing power in the EU states will decrease. But it should be noted that the pegging of the lat to the euro will eliminate the effects of the euro/lat exchange rate fluctuations on inflation," he said.