The risk of inflation becoming rooted is very high, said Bank of Latvia governor Mārtiņš Kazāks in an interview to TV3 programme 900 programme.
«The risk of inflation becoming rooted is very high. Inflation in Eurozone is already above 10%. In Latvia its is even higher. This means the monetary policy’s response is absolutely clear and simple – raising interest rates to reduce the risk of inflation becoming rooted, because a lasting high inflation presents an enormous threat to the economy,» said Kazāks.
At the same time, he mentioned that as the country implements a rational fiscal policy, it is necessary to assist residents with rapidly growing energy and food prices caused by the Russian-Ukrainian war.
«With such a high inflation level the fiscal policy needs to be very focused and well-defined. Any loose euro that is diverted towards support of the fiscal policy means inflation may potentially turn out even higher. This means the interest rates should be increased even more in the monetary policy,» said Kazāks.
He stressed that if support is provided in all directions, inflation will only increase.
«Support mechanisms should not be provided to everyone without focus. Latvia’s budget simply does not have the money to afford it, and we don’t need to go that far.»
«If we don’t act, we will simply contribute to inflation growth, causing the economy to slow down even more, because with high inflation we will lose economic competitiveness,» said Kazāks, stressing that «deepening the crisis even more is the last thing we need».
He also mentioned that Latvia and other Baltic States are small and open economies. This is why inflation in Baltic States is significantly higher than the average in Eurozone. The dependence of Baltic States on Russian gas was much higher when compared to most other European countries. Residents here are also relatively poorer because the income level is behind the average income level in the European Union.
At the same time, Kazāks stressed that the rapid growth of prices of energy resources has already happened. In multiple Eurozone countries the price rise is only expected, as energy prices there are fixated for a longer period of time.
«The energy resource price rise reached the wallets of households much, much more quickly when compared to other countries – for us it is matter of a couple of months, whereas for other countries it normally takes a year, since prices there are generally fixated for a much longer period of time. This means the energy resource price climb has largely already happened in Baltic States, whereas in multiple Eurozone countries it is only set to happen in the future,» said Kazāks.
He also mentioned – even if the price of energy resources is significantly lower when compared to summer, people should not hope they will return to their pre-war levels or a level observed before Covid-19 pandemic in the next couple of years.