RIGA - Central bank head Ilmars Rimsevics told a news conference last week that the government's forecast of 3.5 percent inflation in 2008 implies that the country will not qualify for eurozone membership at that time, which has been the country's goal.
"To a certain degree the convergence report implies that with such figures the Maastricht criteria, specifically the inflation requirement, are unlikely to be met, and thus Latvia will not qualify for the transition to the euro," Rimsevics said.
He noted that theoretically, however, the government still had time to take measures necessary for meeting the criteria. "At present they still have time, although chances are dwindling with each day," he said.
The government passed Latvia's Convergence Program for 2005-2008 in late November 2005. In the program Latvia's inflation rate is planned at 5.6 percent in 2006 and is expected to slow down to 4.3 percent in 2007 and 3.5 percent in 2008. Many analysts, however, say that these targets are all but impossible given the current level of inflation and economic growth and the lack of decisive action on the government's part.
Under the Maastricht criteria, the inflation rate in a country preparing for euro adoption must be no higher than 1.5 percentage points above the average inflation in three EU member states with the lowest inflation.
The Bank of Latvia, which has largely preached to deaf ears on tight fiscal policy, decided to leave the mandatory reserve requirement for banks unchanged for now - 8 percent - though Rimsevics said the bank's council may raise it in the future.
"This decision was taken because the latest increase in the reserve requirement became effective only on Dec. 24, 2005. But it should be noted that with the previous development trends continuing in the economy, the council of the Bank of Latvia will consider the possibility to take further steps to foster balanced and sustainable development of the Latvian economy," the bank said in a statement.
Rimsevics indicated that the previous rise in the mandatory reserve requirement was only "bringing its first fruit" in pushing interest rates up. "It is difficult to comment now whether its effect will show also in more expensive loans, but at any rate, interbank loans have become more expensive," he said.
Last year the Bank of Latvia raised the mandatory reserve requirement on two occasions 's on Aug. 24 from 4 to 6 percent and on Dec. 24 to 8 percent.
The bank said last year's GDP growth is expected to be 10 percent, and Rimsevics added that optimal growth for 2006 would be 6-7 percent. Commenting the 11.4 percent economic growth in the third quarter of 2005, he said, "It increases the doubts about the stability of Latvia's economic growth in the future. Firstly, it is clear that the current rate of economic growth cannot be maintained in the long-term. Secondly, the factors that foster economic growth raise concerns, as the growth is mainly promoted by industries developing on the account of domestic demand," Rimsevics explained.
He said that Latvia had the steepest growth of retail turnover in the European Union for the past six months, but the country ranked only sixth among other EU states by industrial output growth in 10 months last year.
The central bank president also said that increased domestic demand was fostered by banks' active lending policies, as credit balances for loans issued in 2005 increased by 2.1 billion lats.
"So we can say that about 200 million lats per month, or 6.5 million lats per day, flowed into the Latvian economy. The increase in annual lending has not only remained high, but keeps growing reaching even 60 percent for the first time in seven years," Rimsevics said.