S&P sees inflation delaying Latvia's EMU entry

Standard & Poor's said it does not expect the Republic of Latvia (A-/stable/A-2) to join European Monetary Union before 2009 at the earliest due to the authorities' inability to bring inflation down to levels that would ensure compliance with the Maastricht criteria in time for EMU membership on Jan. 1, 2008, as initially targeted.

The consumer price index rose 6.9% year-on-year in February, taking 12-month average inflation to 6.8% from 6.7% at December, the agency said. To qualify for EMU membership in 2008, the 12-month average inflation rate would need to fall below the Maastricht ceiling by the autumn of 2007. The ceiling was 2.5% as of December.

Initially triggered by one-off factors, the sustained price growth is increasingly driven by demand and rising inflationary expectations, complicating disinflation efforts, S&P said. In 2006, domestic demand factors will underpin real GDP growth of 7% to 8% and will continue to exert a pull on prices. Combined with electricity and gas tariff increases, this will prevent average inflation from posting a tangible decline before 2007, the agency predicted.

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