Keeping in mind the limited maneuverability of the monetary policy and the fixed currency rate, it could be problematic for Latvia to preserve a low level of inflation in a medium term perspective, the European Central Bank (ECB) projects.
It is noted in the statement that there are still risks of inflation rising again in Latvia, risks that are closely related to high product prices and a steep salary increase, even with slower economic growth rates than expected. All this indicates a risk of a downward slope for the economy.
The ECB notes that the balancing process could affect inflation in a medium term, keeping in mind that the PIT rate per capita in Latvia is still significantly lower than that in Eurozone and the price level is approximately 30% lower than that in Eurozone. However, it is hard to assess the exact impact of inflation, caused by the balancing process.
Nevertheless, the resumption of credit growth and the presence of a fixed currency mode, and with there being a realistic tendency for currency growth, it is possible for all this to be expressed in a higher inflation level.
It is also said in the ECB Convergence report that according to the EDP requirements, Latvia is obligated to ensure a long term budget deficit decrease in 2012 and fully finish the reform in the time stated in the European Union and International Monetary Fund financial assistance program.
It is stated in the reports that long term interest rates in Latvia for the period of April 2011 – March 2012 were on average 5.8% and this complies with the value of interest rates convergence criteria – which is 5.8%. The improvement of the situation is also evidenced by the fact that Latvia reclaimed access to internal and international markets.
In order for Latvia to guarantee a long term convergence improving conditions, it is necessary to realize an economic policy that is directed towards ensuring the overall macro-economic stability, including long term price stability, ECB points.
It is also stated in the reports that it is especially important for Latvia to continue its fiscal position, in order to hold the credibility for attracting currency. That is why it is necessary to realize the 2012 budget measures and continue a cautious spending policy.
According to the report, by March 2012 Latvia complied with only two of five Maastricht criteria – the interest rate and currency mechanism criteria.
On Wednesday May 30 the ECB reported that not one of eight countries expecting Euro introduction have not yet reached all necessary Eurozone membership criteria.