Inflation threatens Latvia’s euro hopes

RIGA - In the next few months, Latvia must come up with an anti-inflation plan, said Finance Minister Andris Vilks (Unity) on March 10, reports news agency LETA. Vilks believes that the government must discuss this issue already in the next few months so that in the second part of the year it would be ready to act. The implementation of the anti-inflation measures must be carried out in cooperation with the social partners, since it might require society’s solidarity to slow down the increase of wages and bonuses.

Vilks emphasized that the Public Utilities Commission and the Competition Council will play a significant role in combating inflation, as it will be necessary to evaluate all possible tax increases.
He pointed out that Latvia is close to achieving its proclaimed goal, the introduction of the euro, however, it is important to understand that inflation must be brought under control already in spring 2012. According to Vilks, in order to meet the Maastricht criteria, the average annual inflation in 2012 must not exceed 2 percent.

Annual inflation this past February was 4 percent, as compared to February 2010, as prices for goods have increased 5.7 percent, whereas prices for services dropped 0.4 percent, show Central Statistical Bureau data. Compared to this past January, consumer prices in February increased 0.3 percent, including a 0.3 percent increase in prices for goods and 0.2 percent in prices for services.
The Maastricht criteria require that if a country wants to join the eurozone, its inflation rates must be no more than 1.5 percent higher than the average of the three best performing member states of the European Union. Latvia must meet this criterion in 2012.

Not everyone’s convinced that Latvia is on the road to early euro entry. The registered annual inflation in Latvia and Lithuania “corresponds to the initial forecast and will continue to increase,” Danske Bank economists say. In Lithuania, inflation reached 3.1 percent, a 0.2 percent increase compared to January.
Danske Bank senior Baltic analyst Violeta Klyviene emphasizes that inflation in Latvia and Lithuania will continue to increase due to the rising food and oil prices on global markets. According to Klyviene, the Baltic States are influenced by the rising food and oil prices even more than eurozone countries. The increase of production costs on the local market will hamper the recovery of residents’ purchasing capacity, Danske Bank warns.

Taking into account these factors, Danske Bank forecasts 3.4 percent inflation in Latvia and Lithuania in the near future. Previously, the bank predicted 3 percent inflation in Latvia and 3.2 percent inflation in Lithuania.
The Finance Ministry, however, is convinced that inflation will decrease in Latvia next year and the country will be able to meet Maastrich criteria and join the eurozone. The ministry’s spokeswoman, Baiba Melnace, emphasized that Latvia’s proclaimed goal - to join the eurozone on Jan. 1, 2014, has not changed. The government and the Finance Ministry are working hand-in-hand to achieve this.

In order to meet Maastricht criteria on inflation, the government has raised taxes this year, as it will not be able to raise them in 2012 as this would boost inflation. The government, however, cannot affect the prices of raw materials, energy and food on the world market, which already have a significant impact on inflation, admitted the Finance Ministry.