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Latvia chief expects inflation to slow

Latvian inflation will slow from the middle of the year as the economy as a whole is in a cooling phase, central bank chief Ilmars Rimsevics said on Friday.

He was upbeat about the fact that export growth was strong at a time when the rest of the economy was facing a downturn. Rimsevics, speaking at a conference on the Baltic economies, noted that Latvian annual inflation was 16.8% in March. “In the middle of the summer inflation will go down. We will see that this inflation goes down and only down,” he said, without going into details.

The Economy Ministry, in a document about inflationary processes prepared for a cabinet meeting next Tuesday, raised its forecast for average annual inflation to 15-16% and said 12-month inflation in December would be 13-14%. The ministry’s previous forecast was average annual inflation this year of 12-13%. It said the main influence on prices rises this year would be rises in administratively regulated tariffs like gas and heating. Rimsevics, however, was calm about the economic slowdown and played down talk of an upcoming crisis. Latvian gross domestic product growth in 2007 was 10.2%, but the government expects 5.5% this year and next.

But the International Monetary Fund expects growth this year of 3.6% and just 0.5% in 2009. Rimsevics did not give any new forecasts, but noted that an IMF mission, which has been in Latvia this week was surprised to see that export growth in February was 26%. He also said Latvia was protected by the fact that its main banks were all Scandinavian-owned, and that Scandinavian banks had been little affected by subprime losses. “None of them (the Nordic banks) are planning to leave the Baltics,” he said, referring to the likes of Swedbank, Nordea, SEB and Danske Bank, which have all invested in the Baltic region.

Willem Buiter, London School of Economics professor and former chief economist at the European Bank for Reconstruction and Development (EBRD), was more pessimistic, expecting a sharper correction after what he called insane credit growth. “It is clear what needs to be done: what you are doing, but three times as much,” he said, calling for measures such as greater credit controls on borrowers and on banks and counter-cyclical capital requirements. However, he said the Baltic states should keep their exchange rate regimes of fixed currencies against the euro. (Reuters)