Inflation outlook remains grim

  • 2007-10-31
  • Staff and wire reports
RIGA - Inflation in Latvia is set to get worse before it gets better, if Parex Asset Management president Roberts Idelsons' forecasts hold true. In an interview with Latvia's Russian-language business daily Delovije Vesti he said inflation in Latvia might reach 13 percent by the end of the year.
In his opinion, the inflation level will reach its peak in the first quarter of 2008, as it approaches 15 percent. "The economy has it ups and downs, and everything will stabilize, but, regarding inflation, we first have to reach the peak, and this is set to happen in the first quarter of next year; it will hit about 14-15 percent. Meanwhile, the maximum rate of economic growth was reached in the first six months of this year," he said. Idelsons forecasts that in the second half of this year the growth of Latvia's gross domestic product will be about 9 percent.

Idelsons said that lending growth has declined to almost zero, and that retail sales are also declining. "It all means that economic activity is slowing down, but this cannot keep the price growth (inflation) from slowing down," he added.
Asked about the possibility of devaluation of Latvia's currency, the lat, he said he believes the risk to be 20 - 25 percent. "There is a risk, otherwise lending rates in lats would not be so high. It means that people are afraid. What is the possibility? Nobody can say, it is not possible to calculate. In my opinion, it is at 20 - 25 percent. I hope that the top risk level was reached in September, and that now it would be dropping," asserted Idelsons.

In his words, the risk of devaluation will decline considerably if current Bank of Latvia president Ilmars Rimsevics will be re-elected for another term (see related article, this page).
Latvia's GDP in the first half of this year rose 11.1 percent, year-on-year. Consumer prices however surged 11.4 percent in September, year-on-year, which is the highest figure since January 1997.
The government adopted its anti-inflation plan in May 2007, providing for changes in bank lending policies, real estate purchase rules and taxation. The plan became effective in early June and July, though most economists consider that, due to inflation already in the producer and consumer price pipeline, it will take some time for the plan to take full effect.