RIGA - The Bank of Latvia has raised this year's forecast for inflation from 4.5 's 5 percent to 6 percent and boosted reserve requirements in an effort to stem the ultra-rapid consumer crediting driving up demand.
Bank President Ilmars Rimsevics said growth in the consumer price index has been "unacceptably high" and remains the bank's primary concern.
"After the consistently high inflation during the beginning of the year, statistics from the latest months show a slight decrease. Nevertheless, the inflation is slowing down much slower than was expected at the beginning of the year, and the inflation level remains unacceptably high," he told reporters July 14.
"Moreover, the price growth for several groups of goods and services, most likely, will continue this year," he said.
Rimsevics said that various proposals to curb inflation have been suggested, including re-valuing the national currency. "Purely theoretically, a revaluation could serve as a remedy to cut inflation but it is hard to describe the consequences of such a move, the damage it would cause," he said, adding that such a decision could not be made without approval from the European Central Bank.
Rimsevics said the Bank of Latvia would never support a decision to revaluate the lat unless there would be a devastating economic crisis and no prospects for fighting inflation in the future.
Since the lat is pegged to the euro, and Latvian consumers often take loans denominated in euros or dollars, the bank has few levers at its disposal to control inflation, which in Latvia grew at the highest rate among all 25 European Union member last year.
Still, the Bank of Latvia's council decided last week to raise the mandatory reserve requirement to 6 percent from the previous 4 percent. Rimsevics said the decision meant that as of Aug. 24 Latvian banks would have to keep more funds at the central bank 's and thus would be able to lend less.
"Of course, it will have temporary effects, but we do have such an instrument at our disposal and the Bank of Latvia council held that all the instruments we have should be used to fight inflation," exlained Rimsevics.
He noted though the effect on inflation would be small 's some 0.10 - 0.2 percent 's but central bankers "had to take some steps."
Rimsevics said Latvia's economy continues growing fast, though at the same time it is showing signs of macro-economic imbalance, such as high inflation and a current account deficit.
He said that gas tariff hikes are expected this year, which will entail increase in prices of public utilities services, as well as fuel price growth.
Continuing inflationary problems threaten to derail Latvia from its plans to adopt the euro in 2008. However, Rimsevics said that for the time being nothing has changed in the government's plans regarding eurozone membership.
The Bank of Latvia decided to leave interest rates unchanged, with the refinancing rate remaining at 4 percent.
Meanwhile, a spokeswoman for EU Commissioner for Economic and Monetary Affairs Joaquin Almunia said that Latvia still has time to rein in inflation and meet the schedule for eurozone membership.
Amelia Torres told the Baltic News Service that the European Commission would examine Latvia's readiness for joining the European Monetary Union and adoption of the common European currency only in mid-2007. She said that of all the Maastricht criteria inflation was causing Latvia the biggest problems.
The question of Latvia's preparedness became particularly acute after recent media reports that the country may have to wait a couple more years before adopting the common currency.
Prime Minister Aigars Kalvitis said that Latvia had kept all its promises and was committed to joining the eurozone during the first enlargement wave.
