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ncreased competition are “planned to bear fruits in a medium to long term”. Here we concentrate on the first three measures which have the most immediate bearing on the course of inflation in the nearest future. The other measures may have their merits but have only a marginal impact on the likely course of inflation. It is worth emphasizing that an important aspect of the effectiveness of the measures is that they should actually be implemented. For example we see that the measures aimed at the real estate market have already been watered down. Moreover there are doubts about the extent to which it is feasible to effectively impose the announced credit measures. The government plan attempts to solve internal disequilibrium (inflation) and external disequilibrium (the current account deficit) with essentially one instrument, namely fiscal policy. As demonstrated this may restore competitiveness and thus external balance but is likely to require a long and costly process of deflation as has been done by e.g. Germany over a six year period, the price being substantial unemployment. Germany being in the euro zone no longer had the option of using the exchange rate instrument whereas Latvia still does. Latvia may eventually find itself in situation where the pain of a long and costly period of deflation may be weighed against the cost of altering the peg to strengthen competitiveness – and where the latter may be the rational and less painful choice. It is not a matter of Latvia being forced to abandon the peg because of speculation whether in the short term or in the longer term – but the cost of purely fiscal measures may be seen as too high to be the rational choice. However in the BICEPS report from the 2007, year says that the government is late with the stabilization plan, for at least one year.

Inflation in Latvia 1st quarter of 2009

In the end of the year 2008 and in the beginning of the year 2008 Latvia faced the recession, and in the recession the inflation rate has started decrease if we compare with the last years, therefore we can say that the disinflation process has started. In the April 2009 the inflation rate was 5.9% (Eurostat April report). Tоdаy, mоst есоnоmists fаvоr а lоw stеаdy rаtе оf inflаtiоn. Lоw (аs оppоsеd tо zеrо оr nеgаtivе) inflаtiоn mаy rеduсе thе sеvеrity оf есоnоmiс rесеssiоns by еnаbling thе lаbоr mаrkеt tо аdjust mоrе quiсkly in а dоwnturn, аnd rеduсе thе risk thаt а liquidity trаp prеvеnts mоnеtаry pоliсy frоm stаbilizing thе есоnоmy. Thе tаsk оf kееping thе rаtе оf inflаtiоn lоw аnd stаblе is usuаlly givеn tо mоnеtаry аuthоritiеs. Gеnеrаlly, thеsе mоnеtаry аuthоritiеs аrе thе сеntrаl bаnks thаt соntrоl thе sizе оf thе mоnеy supply thrоugh thе sеtting оf intеrеst rаtеs, thrоugh оpеn mаrkеt оpеrаtiоns, аnd thrоugh thе sеtting оf bаnking rеsеrvе rеquirеmеnts, however the inflation in Latvia even in the recession time is exceeding the recommended 3% by the economists. In the other EU countries, the deflation process has started. In Latvia currently there is disinflation process.

As we can see on the graph the Latvia and Lithuania have the highest inflation rate in the April of the 2009, which has adverse effect on the economy. This high inflation is negatively discouraging people to hold money in the banks. Therefore people are tending to spend all the money they are receiving, because of the uncertainty about the future. 

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